Kevin Warsh's Fed 'Regime Change': What It Really Means

$6.6 trillion. That's the size of the Federal Reserve's balance sheet—a number that could shrink dramatically if Kevin Warsh gets his way. Trump's Fed Chair nominee has promised "regime change" at the central bank, but delivering on the president's demand for lower interest rates may prove harder than expected.

Warsh hasn't minced words about his intentions. "They have lost credibility," he said of the Fed in a June 2025 Fox News interview, calling for sweeping changes in how the central bank thinks about inflation, conducts policy, and regulates banks.

The Balance Sheet Battle

At the top of Warsh's agenda sits the Fed's massive balance sheet. Having peaked at $9 trillion in 2022, it now stands at $6.6 trillion—still enormous by historical standards. Warsh wants to slash it further.

"The Fed's bloated balance sheet, designed to support the biggest firms in a bygone crisis era, can be reduced significantly," Warsh wrote in a November Wall Street Journal op-ed. He argues this approach would be more effective than rate cuts for supporting families and businesses.

Treasury Secretary Scott Bessent shares this view, arguing the balance sheet has exceeded the Fed's mandate for stable prices and employment. The move would reduce liquidity flowing to banks and limit excess cash in financial markets—but it also increases interest payments the Fed owes to banks.

Data Skepticism and Market Precision

Warsh has also taken aim at the Fed's data-driven approach. During an April 2025 speech at the Hoover Institution, he criticized the central bank's heavy reliance on monthly jobs reports and inflation gauges.

"I do not find the current Fed policy of 'data dependence' of much real value," Warsh declared. "We should care little about two numbers to the right of the decimal point in the latest government release. Breathlessly awaiting trailing data from stale national accounts... is evidence of false precision and analytic complacency."

This philosophy represents a fundamental shift from the Fed's current approach, which uses economic indicators to guide policy decisions toward a 2% inflation target.

The Rate Cut Reality Check

Here's where Warsh faces his biggest challenge: Trump wants lower interest rates, but the Federal Open Market Committee may not cooperate. The Fed just paused its rate-cutting spree after three consecutive cuts, with most analysts expecting only two more cuts by year-end.

Cornell University's Ryan Chahrour told Quartz that Warsh will likely find it "very hard to convince the FOMC to go along with a big interest rate cut." If he pushes for immediate rate cuts, he could find himself regularly outvoted by the 12-member committee.

Allianz Investment Management's Charlie Ripley warns that aggressive rate cuts could reignite inflation risks—exactly what Warsh has criticized the Fed for allowing during the pandemic era.

Global Market Implications

Warsh's proposed changes extend far beyond U.S. borders. A smaller Fed balance sheet could strengthen the dollar, affecting global trade flows and emerging market currencies. Reduced banking regulation might boost financial sector profits but could raise systemic risk concerns among international regulators.

For global investors, the key question isn't whether change is coming—it's how radical that change will be. Former Fed Governor Roger Ferguson suggests a more measured approach: "More plausible than a revolutionary Fed is a chair who communicates differently and echoes Trump's views on the economy without implementing his most radical ideas."