Warsh Era Brings Balance Sheet Shrinkage and Higher Rates

The appointment of Kevin Warsh as the new chair of the Federal Reserve has significant implications for Canada's economy. As a seasoned economist and investor, Warsh takes office at a critical time when inflation is soaring in the US, with prices rising by 3.8% in April.

Warsh's plans to shrink the Fed's balance sheet, which has ballooned from $800 billion to over $6.7 trillion, could have far-reaching effects on Canadian households and businesses. With a significant gap between the US and Canadian interest rates, a weaker loonie would drive up prices of imported goods in Canada.

As hundreds of thousands of Canadians renew their mortgages in 2026, they will face higher rates, potentially increasing monthly payments by $600 or more per month. This could lead to increased mortgage defaults and strain on the economy.