Kevin Warsh's Nomination as Fed Chair Shifts Focus to Balance Sheet

Kevin Warsh's nomination as the Federal Reserve Chair has shifted market attention from short-term interest rates to the Fed's $6.6 trillion balance sheet and its fundamental role in the market. According to Jin10, Zach Griffiths, head of investment-grade bonds and macro strategy at CreditSights, noted Warsh's consistent criticism of the Fed's balance sheet expansion. Warsh aims to reverse this trend and implement other reforms, though such actions will face complex challenges. These changes could directly impact long-term interest rates and affect the core markets that global financial institutions rely on for daily funding. If policymakers agree to reduce the balance sheet, the market's transmission effects might conflict with the Fed and government's goal of lowering long-term borrowing costs. This could compel the Treasury or other U.S. agencies to intervene more deeply in market management. With borrowing demands rising and the national debt exceeding $30 trillion, such interventions will face significant challenges. PGIM suggests that if Warsh's statements hold true, the pressure to manage these issues will shift to the Treasury.