Citi analyst: Wosh may adopt a gradual approach to reducing the Federal Reserve's balance sheet

BlockBeats News, February 10 — Citigroup strategists stated that Federal Reserve Chair nominee Kevin Warsh may adopt a gradual approach to reducing the central bank’s $6.6 trillion balance sheet to avoid reigniting tensions in the money markets.

Citigroup strategists Alejandra Vazquez Plata and Jason Williams believe that the Fed under Warsh’s leadership still has options to reduce its influence. By rolling over longer-term Treasury holdings into short-term debt, as a “least resistance path,” the weighted average maturity of its holdings can be shortened. The future chair may reach a consensus among policymakers while prioritizing gaining committee support for rate cuts.

Additionally, the Fed could choose to slow its monthly Treasury bill purchases by about $40 billion or halt purchases altogether. Other options include allowing its holdings of mortgage-backed securities to naturally mature and reduce. Citigroup expects the issuance of coupon bonds to begin increasing in November 2026, with a risk of delay until February 2027. (Jin10)