Kevin Warsh arrives at the Federal Reserve on May 15 wanting to shrink a $6.7 trillion balance sheet he told the Senate Banking Committee has 'done quite a bit of harm' to the institution's credibility, per The Dispatch. The last time a Fed chair arrived with ideological clarity about restraint and a mandate to pull back, the plumbing fought back — and won.
The numbers say why. The Fed's own reserve-management experience from late 2024 is the receipt: by October, bank reserves fell thin enough that banks borrowed record amounts at the Fed's overnight backstop on Halloween and New Year's Eve. The Fed stopped shrinking in December, then began buying short-term Treasury bills — branded 'Reserve Management Purchases' — weeks later.
This pattern goes back to every post-crisis consolidation attempt since the Fed's modern balance-sheet era began in 2008: the institution discovers a floor below which contraction becomes systemic risk, not discipline. Warsh will find that floor again. The question is whether he finds it before or after the pipes crack.