#WalshSaysToCautiouslyShrinkBalanceSheet Kevin Warsh Advocates Gradual Balance Sheet Reduction as Fed Nears $6.6T

Kevin Warsh, former Fed Governor and one of former President Trump’s nominees for Fed Chair, has consistently advocated for gradually reducing the Federal Reserve’s balance sheet to restore “normal” monetary policy, limit distortions, and reduce the Fed’s dominance in markets. As of early February 2026, the Fed’s balance sheet stands near $6.61 trillion, down from a peak of roughly $9 trillion, with slight weekly fluctuations due to reserve management and modest T-bill purchases.
Warsh emphasizes a slow and methodical approach, warning against abrupt “shock” unwinds that could replicate volatility seen during past QT episodes, such as the 2018 repo squeeze or 2022 deleveraging. His ideal target is a balance sheet closer to pre-crisis norms (~$3T or ~20% of GDP), but spread over 5–10+ years to avoid market disruptions. The approach pairs gradual QT with potential rate cuts, aiming to maintain support for households and SMEs while gradually tightening long-term financial conditions.
Mechanics of Balance Sheet Reduction
The Fed’s assets, dominated by Treasuries (~$4.28T) and mortgage-backed securities (~$2.02T), exceed liabilities, primarily bank reserves (~$2.9–3.7T) and currency. Gradual reduction occurs mainly through passive QT: allowing maturing bonds to roll off without full reinvestment, which slowly drains system liquidity. Secondary measures, like limited outright sales, are considered riskier due to potential market stress. The effect of this tightening includes higher long-term yields, slightly costlier borrowing, and reduced excess liquidity supporting high-risk assets.
Implications for Crypto Markets
Global liquidity drains directly impact high-beta assets like Bitcoin (BTC) and Ethereum (ETH). BTC has been trading around $67,000–$68,000, with recent swings from ~$60K to ~$68K, reflecting sensitivity to tightening and institutional deleveraging. ETH shows a weaker performance, ranging near $2,000–$2,300, with altcoins lagging behind BTC.
On-chain and market data indicate that stablecoin dominance has risen to ~10.3%, spot volumes are down roughly 30%, and futures open interest has declined, reflecting cautious positioning amid tighter liquidity. Institutional flows are mixed, with notable BTC and ETH ETF outflows offset by some rebounds. Volatility remains elevated, with early February liquidations exceeding $2–$4B per session, demonstrating the market’s sensitivity to tightening measures.
Broader Market and Macro Impacts
Warsh’s framework suggests a cautiously bearish near-term outlook for crypto due to higher volatility and liquidity constraints, while maintaining a potential structural bullish case in the long term. If QT is gradual and complemented by rate cuts, BTC may stabilize as a “sound money” asset narrative strengthens, while ETH and other altcoins could see temporary pressure before broader adoption tailwinds emerge.
Key Takeaways for Traders and Investors
Expect higher volatility and suppressed explosive rallies in BTC and ETH.
Support zones: BTC $60K–$65K, ETH sub-$2K possible on short-term drawdowns.
Gradual QT reduces liquidity but prevents extreme shocks; monitor FOMC guidance and Warsh’s statements for confirmation.
Risk management remains critical: limit per-trade exposure to 1–2%.
Long-term structural trends may favor BTC as a hedge against fiat and institutional adoption grows.
In summary, Warsh’s advocacy for a gradual, disciplined shrinkage of the Fed’s balance sheet prioritizes market stability and measured tightening. While short-term crypto markets may face volatility and liquidity constraints, the long-term narrative positions BTC and regulated digital assets as potential beneficiaries of a more normalized, resilient financial ecosystem.