Rule Changes May Only Modestly Shrink Fed’s $6.7 Trillion Balance Sheet, Governors Signal

New Federal Reserve Chairman Kevin Warsh’s push to shrink the central bank’s $6.7 trillion asset portfolio faces internal skepticism, as regulatory tweaks could only modestly lower bank reserve demand, officials said May 29, 2026. BNP Paribas estimated that a suite of rule changes—including counting discount window capacity toward liquidity requirements, central clearing of repo operations, and upgrading agency and mortgage bonds—might cut reserve demand by about $700 billion from the current $3.1 trillion. But Fed Governor Christopher Waller last week said such moves would likely free up just $300 billion to $500 billion, leaving the balance sheet above $6 trillion. “It’s just not likely to go down very much,” Waller added. Warsh, a long-time critic of large bond holdings, favors a leaner balance sheet to avoid market distortions. However, some policymakers and analysts warn that easing liquidity rules amid scaled-back bank oversight could pose financial stability risks. The debate looms large as the Fed seeks to maintain control over its interest-rate target while draining excess liquidity.