WASHINGTON – President Donald Trump nominated Kevin Warsh, a former Federal Reserve governor, to be the next chair of the Federal Reserve on Friday, setting the stage for a potential overhaul of the central bank’s approach to monetary policy and its balance sheet. The move comes as Trump seeks to influence interest rates and reduce the national debt, and follows months of open discussion about replacing current Fed Chair Jerome Powell, whose term ends in May.
Warsh, if confirmed by the Senate, would inherit a Federal Reserve that has begun to unwind the massive asset purchases undertaken during the COVID-19 pandemic. The Fed’s balance sheet peaked at $8.96 trillion in April 2022 before beginning a steady decline, reaching $6.62 trillion in December 2025, according to recent data. Trump has repeatedly criticized Powell for not lowering interest rates more aggressively, and Warsh is seen as more aligned with the president’s preference for lower borrowing costs.
The nomination has drawn widespread praise from Republican lawmakers, who see Warsh as a credible and experienced candidate. Senate Committee on Banking, Housing, and Urban Affairs Chairman Tim Scott stated that Trump’s choice “reflects that focus” on accountability and credibility at the Fed. Senator Jim Banks emphasized Warsh’s understanding of China’s economic ambitions and expressed eagerness to work with him to maintain American financial supremacy.
Warsh served on the Federal Reserve’s board from 2006 to 2011, during and after the 2008 financial crisis. He was initially reluctant to lower interest rates and implement large-scale asset purchases to stabilize the financial system, a stance that contrasts with the more aggressive approach taken by the Fed in recent years. This hawkish tendency, coupled with a reputation as a fiscal moderate, suggests Warsh may prioritize reducing the Fed’s balance sheet and limiting its role in broader economic policy.
According to analysts, Warsh intends to reduce the Fed’s balance sheet, believing that a decrease in liquidity and an complete to expansive monetary policy will allow for lower interest rates without triggering inflation. Though, the path to achieving this goal is fraught with potential risks. Four primary strategies have been identified as potential avenues for Warsh to shrink the Fed’s holdings.
One option is to halt the Fed’s recently initiated program of purchasing short-term Treasury securities, begun in December 2025 to ensure sufficient liquidity in the banking sector. However, analysts at Citi caution that even if purchases were to cease immediately, a significant impact on the Fed’s reserves wouldn’t be seen until December 2026. Abruptly ending the program could as well reignite liquidity concerns, potentially mirroring the tensions observed in late 2025 that prompted the program’s inception.
Another possibility involves altering banking regulations to reduce the minimum reserve requirements for banks. This would decrease the demand for reserves held at the Fed, thereby lowering the central bank’s liabilities and shrinking its balance sheet. Federal Reserve Bank of Dallas President Lorie Logan has acknowledged this possibility, but implementation would fall to Vice Chair for Supervision Michelle Bowman, who is currently focused on implementing reforms to the Basel III international banking regulations.
Warsh could also shift the Fed’s portfolio towards shorter-term debt by selling mortgage-backed securities (MBS) and exchanging long-term bonds for Treasury bills. Although this would provide greater flexibility in managing the balance sheet, it could also increase borrowing costs for the U.S. Government, a concern for both Trump and Treasury Secretary Scott Bessent. Barclays estimates that such a shift could force markets to absorb $1.7 trillion in new 10-year Treasury bond issuance over the next five years, potentially increasing the cost of financing for the country by 40 to 50 basis points.
A more direct approach would involve the Fed actively selling bonds to reduce its balance sheet. This could also raise U.S. Borrowing costs and generate operating losses for the Fed, potentially requiring a capital injection from the government. Economists at Morgan Stanley estimate that such losses could double the Fed’s current loss levels.
Despite the potential risks, Warsh appears to believe the benefits of his strategy outweigh the drawbacks. He views the Fed’s recent monetary interventions as having blurred the lines between fiscal and monetary policy, and believes the central bank has overstepped its proper role. Treasury Secretary Bessent has previously expressed similar concerns, stating that the Fed’s balance sheet has “difuminado las fronteras entre la política económica y la fiscal” (blurred the boundaries between economic and fiscal policy). The alignment between Warsh and Bessent suggests a coordinated effort to reshape the Fed’s role in the U.S. Economy is likely.
