Will the New Fed Chair Warsh QT?
1. Core Concern & Background
The primary worry stems from Warsh's historical criticism of Quantitative Easing (QE). The market fears he may act on these views by reversing the policy and starting QT, leading to recent asset price volatility.
2. Key Concepts Explained
The Fed's "Balance Sheet": The Fed's assets (like long/short-term U.S. Treasuries and Mortgage-Backed Securities) and liabilities (like bank reserves and cash in circulation).
QE (Quantitative Easing): The Fed expands its balance sheet by buying long-term bonds to lower long-term interest rates, which stimulates the economy and boosts stock prices.
QT (Quantitative Tightening): The reverse process. The Fed shrinks its balance sheet by either selling bonds or, more commonly, not reinvesting the proceeds from maturing bonds.
3. Analysis: Is QT Under Warsh Likely?
Conclusion: The risk is low in the short term.
Practical Constraints: QE has been a necessary crisis-response tool (2008 financial crisis, 2020 pandemic). Even Warsh would likely have used it in those situations.
Lack of Fed Consensus: The Fed just completed a three-year QT cycle (2022-2025), reducing the balance sheet from 8.9 trillion to 6.6 trillion. Reversing this recently established policy so soon would lack internal support.
Political Pressure: Initiating QT would likely cause long-term interest rates to spike and stock prices to fall. This outcome would contradict the economic goals of President Trump ahead of midterm elections, making Warsh's appointment politically incompatible with such a move.
