Fed Under Warsh May Gradually Scale Back QT to Stabilize Markets

The incoming Fed Chair, Kevin Warsh, is likely to pursue a gradual reduction of the Fed's $6.6 trillion balance sheet to avert renewed money-market stress, according to Citigroup. A restart of quantitative tightening (QT) could re-pressurize the $12.6 trillion回购 market, which briefly froze in December 2024 when policy actions drove repo rates sharply higher. Citigroup strategists note the high political and operational cost of QT. Warsh's options include swapping longer-term Treasuries for shorter-term ones, reducing or pausing the roughly $400 billion monthly purchase of Treasuries, and allowing MBS to naturally mature. The Fed is expected to slow purchases to about $200 billion starting in April and maintain a accommodative stance through the end of the year, with excess reserves not expected to decline materially until late 2026. Moody's Analytics analysts caution that scaling back without tightening financial conditions is difficult and could trigger broader market volatility. Warsh is likely to balance policy with macroprudential stability, reflecting President Trump's focus on financial conditions as well as the Fed's pivotal role in managing the target federal funds rate.