Will Kevin Warsh Trumpify the Federal Reserve?

Mr Warsh has essentially two substantive ideas for meaningful reform. One is his desire to trim the Fed’s balance-sheet in short order. Many observers agree that, at $7trn, it is bloated. Although Mr Warsh has signalled he does not favour shrinking the central bank’s bond holdings at breakneck pace, any movement in that direction goes directly against the Fed’s recent decision to end “quantitative tightening”, where the balance-sheet shrinks gradually by letting bond holdings mature. The effect of bond sales could be to lower their prices and, since the two move inversely, push up yields. To offset those rising yields, which determine other interest rates in the economy such as those for mortgages, Mr Warsh would cut short-term rates. But since the effect of the Fed’s bond sales on yields is uncertain, the exercise could blow up if not handled deftly.