The next US Federal Reserve chair seems to think that the large size of the central bank’s balance sheet reflects a discretionary policy choice which can and should be reversed. In reality, however, the Fed’s balance sheet has become part of the financial system’s core infrastructure, and shrinking it would carry serious risks.
LONDON – Financial markets welcomed the nomination of Kevin Warsh to succeed Jerome Powell as Chair of the US Federal Reserve, and it is easy to see why. Warsh is neither a MAGA ideologue nor an inflation alarmist. He is a seasoned policymaker who operates according to a clear analytical framework, shaped by his work at the Fed during the 2008 global financial crisis, and he views bureaucratic excess with healthy skepticism. But while Warsh has experience and a degree of intellectual rigor in his favor, he is at risk of making a critical mistake when he assumes the helm.
