Kevin Warsh signals review of Fed’s ample-reserves regime

Testifying before the House Financial Services Committee, Warsh confirmed that a specialized task force is evaluating the advantages and drawbacks of maintaining large bond holdings. While he acknowledged that the current regime—which mandates substantial asset levels to ensure liquidity—may require adjustment, he cautioned that a total return to the scarce-reserves system used before 2006 remains unlikely. The Fed currently holds trillions in long-term Treasury debt and mortgage-backed securities, assets accumulated through successive rounds of quantitative easing during the 2008 crash and the COVID-19 pandemic.

Warsh, who previously served as a Fed governor and held reservations about the expansion of the central bank's footprint, emphasized that any transition would be methodical. The Fed has already reduced its balance sheet by approximately $2.2 trillion from its $9 trillion peak, though recent modest growth has occurred to maintain system liquidity. While Warsh maintains that aggressive balance sheet expansion is a vital tool during market crises, he argued that monetary policy should eventually shift back to being driven primarily by interest rate adjustments. He promised that any future reforms would be transparent, well-deliberated, and signaled far in advance to avoid market volatility.