Kevin Warsh has complained about the size of the Federal Reserve’s balance sheet, which peaked at nearly $9 trillion in 2022.
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Kevin Warsh, a former Federal Reserve governor, has been nominated by President Trump to lead the U.S. central bank. A longtime critic of the Fed’s post-2008 trajectory, Warsh has argued that the institution has drifted too far from its original mission. His nomination signals a possible effort to steer U.S. monetary policy back toward a more traditional approach.
The Waning Influence Of The Fed
Warsh’s return to prominence coincides with a period during which the Federal Reserve’s influence has become more ambiguous. Despite its extensive use of bond-buying programs and extended periods of low interest rates, the Fed has had mixed success in steering inflation and growth.
Warsh has been blunt about that failure. He has called the Fed’s COVID-era response “the greatest mistake in macroeconomic policy in 45 years,” faulting policymakers for leaning too heavily on lagging data and for mistaking emergency tools for permanent features of the policy landscape. He has also argued that the Fed needs better real-time indicators to understand what is actually happening in the economy, rather than what happened months ago.
Over the past 15 years, the Fed’s balance sheet ballooned to levels that would once have been unthinkable, peaking near $9 trillion. What began as an emergency response to the 2008 financial crisis gradually became routine. While Warsh supported early rounds of quantitative easing, he has since emerged as one of the most vocal critics of the Fed’s prolonged reliance on these tools. Warsh has said the Fed went too far with its crisis-era interventions and that many of those policies have now persisted too long.
Blurring The Fiscal-Monetary Line
One of Warsh’s deepest concerns is that the Fed became too entangled with fiscal policy. During the pandemic, the Fed purchased vast quantities of government debt just as Congress enacted historic levels of deficit spending. Even if technically conducted through secondary markets, the economic effect looked a lot like deficit financing.
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The blurring of fiscal and monetary policy is broader than that, however. Tools such as quantitative easing, targeted credit facilities, and balance-sheet management now operate at a scale comparable to federal spending programs and carry fiscal-like consequences.
When the Fed suppresses long-term interest rates, it also reduces the government’s borrowing costs and makes large deficits easier to sustain politically. When it allocates credit through emergency lending programs, it influences which sectors benefit and which do not. These are distributional choices, traditionally the domain of elected officials rather than the Fed. At the same time, Congress, by issuing large quantities of debt that function as money-like liabilities, increasingly shapes nominal conditions once thought to fall squarely within the Fed’s control.
Warsh has warned that this convergence erodes institutional clarity and weakens Fed independence over time. In response, Warsh has floated the idea of a modernized Treasury-Fed Accord, modeled on the 1951 agreement that restored monetary independence after World War II. The goal is to reestablish clear boundaries about what monetary policy is and is not.
Congressional Ascendancy And Fed Independence
While critics worry that Warsh’s approach could politicize the Fed, others argue that the line between fiscal and monetary policy has already become porous, regardless of who chairs the central bank. However, market discipline now plays a central role in enforcing restraint on the Fed. Should the Fed act imprudently, financial markets respond swiftly through rising yields or declining asset prices, mechanisms that serve as effective constraints on profligacy. On the other hand, if investors believe that debt will ultimately be serviced through taxes or spending restraint rather than inflation, price stability can still be preserved.
Moreover, the value of the currency is increasingly linked to perceptions of fiscal sustainability. If investors expect that public debt will be serviced through future budgetary adjustments, then the dollar will continue to be perceived as a reliable store of value. In this context, enhanced fiscal involvement in monetary matters may be less destabilizing than some presume.
With federal debt and central bank liabilities both at historic highs, the system becomes more fragile and sensitive to shifts in investor confidence. Reducing deficits and shrinking the Fed’s balance sheet would reinforce one another, promoting resilience and restoring policy flexibility.
One of Warsh’s most well-known policy positions is his call for a reduced central bank balance sheet. Although the Fed’s assets have declined from their 2022 peak, they still total roughly $6.5 trillion today—far above pre-pandemic levels. Warsh believes that such an expansive footprint distorts capital allocation and creates dependencies that are difficult to unwind. He has advocated for a gradual but meaningful reduction in the Fed’s holdings.
Coordination between Warsh and Treasury Secretary Scott Bessent could result in more coherent debt management strategies. For example, synchronizing Treasury issuance with central bank asset reductions could mitigate market volatility. Such cooperation would represent adaptation to the realities of a more integrated policy landscape, rather than politicization.
Monetarism Revisited
Warsh has expressed admiration for the intellectual tradition known as monetarism, especially its emphasis on rules-based policy. However, implementing monetarist principles in the modern financial system poses serious challenges. Central banks do not directly control broad money because financial institutions are central players in monetary creation. Velocity, or the rate at which money circulates, is also unstable and hard to forecast. These constraints limit the effectiveness of pure monetarist approaches. Nonetheless, Warsh’s perspective could reintroduce useful monetary aggregates into the Fed’s analytic toolkit, serving as a counterbalance to the Fed’s current overreliance on short-term interest rate adjustments.
The Fed As A Follower, Not A Leader
In practice, the Fed increasingly reacts to financial markets rather than leading them. Warsh’s nomination is unlikely to overturn that reality. The structure of the Federal Open Market Committee also encourages consensus, and market expectations constrain what policymakers can plausibly do.
As Mohamed El-Erian has observed, Warsh believes reform must come from within if the Fed is to preserve its legitimacy: “If you don’t reform the Fed from the inside, people will try to reform it from the outside.” That outlook reflects pragmatism, a belief that gradual, internal reform is preferable to more disruptive changes imposed from the outside.
Ultimately, Warsh’s nomination can be seen in the context of a broader evolution in macroeconomic policy. The Fed remains powerful, but it no longer operates in isolation. Monetary outcomes now depend as much on fiscal choices and market expectations as on central bank decisions. Restoring price stability will require a focus on all three.