A new Federal Reserve Chairman has the potential to radically re-shape the way monetary policy is conducted in the U.S.- but, what’s the real story?
Revolution at the Fed?
A chorus of powerful men is calling for revolution at the Fed. David Malpas, former World Bank president being one of the most notable.
It's not controversial anymore, the Fed is broken.
Jerome Powell's time is up- a new Fed chair is coming soon. This past Tuesday, Kevin Warsh sat before the Senate Banking Committee for his confirmation hearing to become the next chairman of the Federal Reserve.
Outside of the typical political food fight, the most substantive part of the day was Warsh's unusually blunt assessment of where the Fed has gone wrong and what he thinks needs to change.
Warsh called the ‘policy mistakes' of 2021 and 2022 a "fatal policy error". He said the kind of loose, reactive approach that oversaw M0 money supply increasing by over 85% and leaving inflation running red hot, left households and businesses still paying the price years later.
He criticized the Fed for enabling reckless fiscal policy from the Federal Government and its ridiculously large deficits.
M0 Money Supply (monetary base) – Percent Change from February 2020 to February 2022, and the end of balance sheet expansion.
His proposed fix?
A full "regime change" as he called it: a narrower focus on the core dual mandate of price stability and maximum employment, a fresh inflation framework (different metrics), far less reliance on unconventional tools, and a meaningfully smaller balance sheet.
“A SMALLER BALANCE SHEET?!"
The Reverse Money Printer
That last point matters. For more than a decade the Fed has leaned hard on quantitative easing ("QE")- massive rounds of Fed money printing to buy financial assets from the banks that effectively printed trillions in new reserves to keep markets afloat and rates suppressed.
During the response to COVID, the Fed printed $3 trillion in bank reserves- just created out of thin air.
During the ongoing responses to the GFC, the Fed printed $3.2 trillion in bank reserves.
Remember, when the Fed engages in QE, they are printing money out of nothing. The way they get the freshly printed dollars "into the system", is by using them to buy things like bonds from the banks-
The bank gets freshly printed dollars, and the Fed gets an asset to go on its balance sheet.
But if QE/balance sheet expansion is the Fed printing money, what's the opposite? Remember, the Fed's balance sheet is just one side of the ledger- the asset side. When Fed assets are growing (like during QE), by definition, one of the liabilities must be growing as well.
But the opposite is also true, too. As the Fed's assets shrink, so too must their liabilities also shrink.
A look under the hood- both sides of the Fed's balance sheet. Assets = liabilities + capital
It's important to note, Warsh hasn't provided very much detail on how exactly this would happen. For example, we know that in the past 10 years, every time the Fed has tried to shrink its balance sheet (QT), it has caused a crisis in the repo market (2019 and again in the second half of 2025).
This was mainly due to one Fed liability- bank reserves. Another liability of the Fed, the Treasury General Account (the "TGA", or government's checking account at the Fed), being built up in the 2nd half of 2025, also caused stress in the repo market.
Every time they try to shrink the balance sheet, disaster follows soon after. How do they inevitably deal with the stress that QT causes?
More money printing.
QE became the default response to every slowdown, every crisis, every dip in asset prices. It expanded the Fed's balance sheet from under $1 trillion before 2008 to nearly $9 trillion at its peak, flooding the system with easy money and distorting everything from bond yields to risk pricing.
And of course, giving birth to Bitcoin in response.
But is that coming to an end?
Goodbye Money Printing?!
The confirmation hearing made one thing crystal clear: even the incoming Fed chair recognizes that years of easy money and balance-sheet expansion have left the system more fragile than it looks on the surface. Warsh is talking a big game about regime change and substantially unwinding some of that legacy.
But, will he actually do it? Even if he wanted to, can he do it?
History shows how sticky and embedded these tools become once they're in the toolkit. Every time markets wobble or the economy slows, the temptation to fire up the money printers is enormous.
The incentives haven't changed.
Equally important, the structure of the system hasn't changed. Remember that by the Fed's own math, the basis trade (which is funded via SOFR in the repo market) accounted for 42% of the demand for Treasury Bonds from 2022-2025.
They can't allow for SOFR spreads to widen due to scarce reserves, or nearly half of the demand for their debt will vanish.
The political pressure to keep asset prices high and borrowing costs (i.e.interest rates/bond yields) low hasn't gone away. And the Fed's own track record of promising restraint only to expand again when it matters most is well established.
Whether Warsh can deliver a genuine shift away from the easy-money era or whether we just get another round of the same old playbook with new rhetoric remains to be seen. What we do know is this: every extension of the old regime just reinforces the same structural reality and makes it a larger beast, harder to ever reverse. Capital keeps searching for the one asset that was never built on endless QE, never needed a central bank backstop, and never required a confirmation hearing to prove its scarcity.
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Benzinga Disclaimer: This article is from an unpaid external contributor. It does not represent Benzinga’s reporting and has not been edited for content or accuracy.
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