Fed Balance Sheet Swells Back to Pre-Quantitative Tightening Levels

Kevin Warsh, an outspoken critic of the Federal Reserve's large balance sheet, is facing a daunting challenge in his effort to shrink it. The central bank's assets have ballooned to $6.75 trillion, up from around $4.3 trillion at the end of quantitative tightening (QT) in 2025.

The Fed began purchasing Treasury bills again last year as part of its reserve management program, which has added trillions to its balance sheet despite ongoing reductions in mortgage-backed securities. This shift has left Warsh and other critics questioning whether it's even possible for the central bank to significantly shrink its footprint without destabilizing the financial system.

The Fed's current abundant-reserves framework relies heavily on paying interest to banks on their reserve balances, which acts as an anchor for short-term borrowing costs. However, this arrangement creates a large institutional footprint and makes it difficult to reduce the balance sheet without disrupting markets.