Could Kevin Warsh sharpen the debate over the Fed's balance sheet?

Markets may focus on the balance sheet, not the politics

Kevin Warsh's Senate nomination hearing is scheduled for 21 April 2026 and will formally centre on his candidacy to lead the Fed. For markets, though, the more important question may be how he now sees the central bank's balance sheet.

As of 15 April 2026, the Fed's assets stood at $6.71 tn, including $4.41 tn in Treasuries and almost $2 tn in agency MBS. At the same time, the Fed is still conducting technical bill purchases, albeit at a slower pace than before.

That backdrop suggests the market's base case ahead of the hearing may not be an immediate hard return to quantitative tightening. Instead, traders may be looking for clues on when the current liquidity bridge will be phased out and how any further balance-sheet reduction may be handled.

The Fed is already slowing bill purchases after tax season

In the current schedule for 14 April to 13 May 2026, the New York Fed desk plans around $15.5 bn of reinvestments and an additional $25 bn of bill purchases aimed at maintaining an adequate supply of reserves. That is materially below the earlier pace of $40 bn a month and fits with Roberto Perli's March remarks that purchases would probably slow significantly after tax season.

At the same time, official Fed data show the Treasury General Account has risen to $924.4 bn while bank reserves have fallen to around $2.98 tn. That still does not look like a comfortable backdrop for an aggressive shrinkage of the balance sheet.

For that reason, markets may listen less for whether Warsh thinks the balance sheet is too large, which is already well understood, and more for whether he accepts the current ample-reserves regime or would prefer the Fed to move more quickly towards a smaller liquidity footprint. If he stresses that bill purchases were only a temporary bridge for tax-season liquidity pressure and should fade after May, the long end of the curve may read that as a hawkish signal.

MBS may matter more than the headline size of the balance sheet

Warsh has long criticised the Fed's large balance sheet and has argued that such an expanded portfolio reflects too much central-bank influence over the economy. For markets, however, the structure of the balance sheet may matter almost as much as its size.

Agency MBS remain the most sensitive part of the portfolio because they keep the Fed directly involved in housing finance and mortgage costs. That means investors may listen for more than general remarks about a smaller balance sheet. They may also want to know whether Warsh sees the future in a purely passive run-off of MBS or whether he would prefer a faster change in the portfolio mix.

Miran's remarks may keep expectations grounded

Another useful reference point comes from Stephen Miran's speech on 26 March 2026. Miran argued that the Fed could eventually shrink its balance sheet by as much as $1 tn to $2 tn, but he also cautioned markets on the speed of that process.

He noted that getting reserves materially lower would probably require regulatory and procedural changes, including looser liquidity requirements, adjustments to stress-test treatment and less stigma around use of the discount window and the standing repo facility. He also argued that implementation would need to move through Administrative Procedure Act processes, meaning preparation alone could take more than a year and the full reduction process could stretch across several years.

That is an important counterweight for markets. Even if Warsh clearly prefers a smaller Fed, the practical route to faster balance-sheet reduction, especially with MBS still in the portfolio, may not be short. Reuters has already reported that investors have started to price a steeper yield curve under a Warsh-led Fed, because lower policy rates combined with a smaller balance sheet would mean less Fed demand for debt and more rate risk for the market to absorb. That mix may also leave the S&P 500 sensitive to any hint that the current liquidity bridge could fade faster than expected.

The most likely outcome today may therefore be that Warsh does not offer a detailed timetable for balance-sheet reduction, but instead sketches a direction of travel. After the hearing, traders may want to watch the next New York Fed purchase schedule after 13 May, the weekly H.4.1 data on reserves and the TGA, and any fresh references to active MBS sales. Those signals may show whether the current liquidity bridge is only fading out or whether the groundwork is being laid for a meaningfully smaller Fed balance sheet.