Kevin Warsh's delayed Senate confirmation hearing is injecting fresh uncertainty into the Federal Reserve’s approach to its balance sheet just as the central bank has resumed modest expansion through reserve management purchases (RMPs). After concluding its balance sheet run-off in December 2025, the Fed's total assets stood at approximately $6.7tn as of early April 2026.
Warsh Nomination Adds Uncertainty to Fed Balance Sheet Path
17 April 2026 - 19:42 CEST
Kevin Warsh, President Trump's nominee to succeed Jerome Powell as Fed chair when Powell’s term ends on 15 May, has long advocated for a smaller central bank footprint. Warsh served as a Fed governor from 2006 to 2011 and played a prominent role as the central bank's liaison to capital markets during the 2008 global financial crisis. His Senate Banking Committee confirmation hearing is now set for 21 Apr after a short delay related to paperwork.
RMPs counter seasonal liquidity drains
The New York Fed's Open Market Trading Desk, under instructions from the FOMC, initiated RMPs in mid-December 2025, conducting purchases at a $40bn monthly pace focused on Treasury securities with remaining maturities of three years or less. The programme helps offset temporary drains on reserves, particularly those stemming from fluctuations in the Treasury General Account (TGA).
Sandmark analysis of data from the FRED database shows average weekly net purchases of roughly $9.5bn through early April, bringing the cumulative total to $171bn as of 8 Apr. Over recent months, the Fed bought approximately $94bn in securities maturing in 16–90 days and $95bn in those maturing between 91 days and one year.
On the liability side, reserve balances rose by about $184bn during this period.
Post-April outlook
Roberto Perli, manager of the System Open Market Account at the New York Fed, has indicated that the monthly RMP pace will likely decline significantly after April as initially planned. This adjustment aligns with typical seasonal patterns in fiscal flows. Perli noted that any reduction may proceed gradually to account for lingering uncertainty and evolving market conditions.
Over the longer horizon, the FOMC seeks to maintain reserves in an ample range. This framework is defined broadly as the level at which the federal funds rate shows only modest sensitivity to changes in reserve supply, with no fixed numerical threshold. Reserves play a central role in monetary policy transmission, facilitating intraday settlements, supporting bank liquidity and helping institutions meet post-crisis regulatory requirements.
The size of the Fed's balance sheet will continue to be shaped primarily by developments on the liability side. The three dominant components – currency in circulation (around $2.4tn), the TGA (recently fluctuating near $900bn), and interest-bearing reserves – together account for roughly 90% of total liabilities.
Currency in circulation tends to expand gradually in line with nominal economic growth. US real GDP increased 2.5% in 2025. The TGA balance reflects Treasury cash management practices and underlying fiscal deficits, with the department generally aiming to hold roughly one week's worth of projected outflows. Reserve demand, meanwhile, has expanded dramatically – by a factor of roughly 200 since before the 2008 crisis – driven by heightened liquidity regulations and banks' preference for earning interest on holdings at the Fed rather than lending them in the open market.
Structural hurdles to meaningful reduction
Warsh has repeatedly expressed support for shrinking the Fed's balance sheet. Yet, achieving this goal faces significant operational and market challenges. Reducing asset supply without a commensurate decline in demand risks elevating volatility, as occurred in September 2019 when the Secured Overnight Financing Rate moved away from the interest rate on reserve balances, complicating policy implementation.
The currency growth and TGA account offer limited flexibility for future contraction. Currency must rise with the economy, while TGA movements are often offset by the reserve balances on the Fed's books. This leaves reserves as the main adjustable component.
Banks have grown cautious about actively trading reserves, influenced by post-crisis rules such as the Comprehensive Liquidity Analysis and Review, which encourage holdings of reserves over other liquid assets like Treasury bills. The payment of interest on reserves further reduces incentives for interbank lending, creating potential frictions that can amplify volatility if aggregate levels approach the lower end of the ample range.
Expert proposals for a smaller footprint
Recent policy discussions, including at the Brookings Spring Conference, have examined ways to reconcile a desire for reduction with the ample reserves mandate. Stanford professor Darrell Duffie outlined four approaches in a paper presented at the event:
- temporary open market operations to buffer unexpected shocks to reserve supply,
- revisions to intraday liquidity regulations and their supervision,
- introduction of a liquidity savings mechanism to the Fed's primary payment system,
- and tiering of interest rates paid on reserves to encourage banks to lend out balances not required for payments processing.
London School of Economics professor Riccardo Reis proposed establishing a standing repo facility that would allow banks to exchange reserves for Treasury bills. Such a mechanism could help establish a horizontal reserve supply curve, reduce excess volatility, mitigate regulatory frictions and keep the overall balance sheet size more closely aligned with actual demand.
Harvard professor Jason Furman and University of Chicago professor Anil Kashyap suggested that shortening the average maturity of assets held on the Fed's balance sheet could achieve a form of effective reduction, with Furman noting it would function roughly as if the central bank held no balance sheet at all.
Implications for global liquidity and crypto
The Federal Reserve's balance sheet remains arguably the single largest influence on global dollar liquidity conditions. Any sustained move toward shrinkage, even if gradual, would likely exert a tightening effect on financial conditions.
Money market rates have remained relatively stable lately, consistent with the current ample reserves environment. For participants in cryptocurrency markets, the trajectory matters because Bitcoin, Ethereum and other major digital assets have historically displayed sensitivity to shifts in dollar liquidity and broader risk appetite. During the 2022 quantitative tightening cycle, for instance, tightening liquidity conditions contributed to sharp drawdowns across crypto markets.
A Warsh-led Fed would confront the task of balancing its preference for a leaner balance sheet against the need to preserve effective monetary policy transmission and avoid disruptive volatility. Structural changes to the payment system or reserve management framework could carry longer-term consequences for liquidity dynamics across traditional and digital asset classes.
The path forward will depend heavily on confirmation outcomes, incoming economic data and the FOMC's evolving assessment of reserve demand. Until then, markets will continue to monitor RMP adjustments and liability-side developments closely.
