Citi strategists have indicated that Kevin Warsh, who has been nominated as the Federal Reserve Chairman, is likely to adopt a gradual approach to reducing the central bank's balance sheet, which is approximately $6.6 trillion.
According to Zhitong Finance APP, Citi strategists stated that Kevin Warsh, nominated as the Federal Reserve Chairman, is likely to reduce the central bank's balance sheet of approximately $6.6 trillion in a gradual manner to avoid reigniting tensions in the money market. The analysis pointed out that any move to restart quantitative tightening (QT) could again pressure the $12.6 trillion repo market.
Citi noted that the Fed paused its balance sheet reduction in December last year precisely because repo rates had risen sharply. This market serves as a core venue for short-term borrowing by banks to meet their daily liquidity needs. Strategists Alejandra Vazquez Plata and Jason Williams wrote in the report that given the significant volatility experienced by the repo market last year, the threshold for restarting QT is 'very high.' Policymakers clearly prefer to avoid a repeat of the October 2025 stress and are opting for a more moderate path of balance sheet management.
Warsh, who previously served as a Federal Reserve governor, has long advocated for significantly reducing the central bank's financial 'footprint.' During the global financial crisis and the COVID-19 pandemic, the Fed expanded its balance sheet through multiple rounds of asset purchases, reaching $8.9 trillion in June 2022—a substantial increase from about $800 billion nearly two decades earlier. Later last year, after increased government borrowing and the effects of balance sheet reduction drained liquidity from the money markets, the Fed paused its reduction efforts and instead began purchasing Treasury bills monthly to replenish reserves in the system.
However, Citi believes that under Warsh’s leadership, the Fed still has various 'deleveraging' options. The path of least resistance involves rolling over maturing long-term bonds into short-term debt, thereby reducing the weighted average maturity of holdings. The strategists also noted that Warsh might prioritize gaining committee consensus on rate cuts while gradually advancing on balance sheet management.
Other optional measures include reducing the current scale of Treasury bill purchases, which is approximately $40 billion per month, or even halting them entirely, or allowing mortgage-backed securities (MBS) to naturally mature and exit. Citi’s analysis shows that even if the Fed ends purchases as early as June, reserve levels are unlikely to decline significantly before December 2026. The baseline scenario is that starting from mid-April, the monthly purchase pace will drop to around $20 billion and continue throughout the year.
Moreover, the New York Fed’s open market operations department expects that to offset the significant increase in non-reserve liabilities due to tax season in April, reserve management-related purchases will remain elevated in the coming months; subsequently, the overall pace of purchases may slow down considerably. In the DecemberFederal Open Market Committee(FOMC) meeting minutes also showed that participants tended to concentrate purchases on Treasury bills, gradually aligning the Fed’s portfolio with the structure of outstanding Treasury debt.
Citi also noted that the Treasury Department may be willing to accommodate additional demand for Treasury bills from the Fed, thus relying more heavily on short-term debt issuance and postponing increases in long-term coupon bond issuance. Based on this assessment, Citi expects the issuance of coupon-bearing bonds to start as early as November 2026, with a risk of being delayed until February 2027.
Editor/Stephen
