Forget the Interest Rate: The Real War Is Over the Fed’s Balance Sheet

The April 29 meeting of the Federal Reserve System will go down in history perhaps not for its decisions but for its complete irrelevance for the formation of long-term strategies. The central bank left the base rate without changes in the range of 3.50–3.75%. We saw an extremely rare, by the measures of the Fed, split vote: one participant (Steven Miran) demanded an immediate cut, while three others (Hammack, Kashkari, and Logan) voiced harsh criticism of any "dovish" hints in the accompanying statement amid sticky inflation.

Markets and the financial media can dissect these disagreements for hours. But the harsh truth is that this is most likely nothing more than informational noise. The decisions of the current leadership of the Fed are already history. Jerome Powell is practically a lame duck, and what happens at his last meetings is probably absolutely not relevant for where the markets will move tomorrow.

The real news, determining the architecture of the world financial system for years forward, happened that same day in an entirely different place. In parallel with the meeting of the Fed, the Senate Banking Committee voted (13 votes "for", 11 "against") for the advancement of the candidacy of Kevin Warsh as the next head of the Federal Reserve.

The door is now open.

For a cardinal change of leadership and—what is much more important—the change of the very monetary philosophy. It is time for investors to cease looking in the rearview mirror and to turn attention to who will stand at the helm tomorrow.

The Figure of Kevin Warsh: A Cautious Look Into the Future and a “Regime Change”

It is too early to say with a hundred-percent probability that Warsh already became the head of the Fed—ahead is still the Senate's confirmation vote. However, the political layout makes his confirmation an extremely probable scenario. And if (or, more correctly, when) this will happen, the financial world will seemingly collide with a reality it has long forgotten.

The potential new head of the Fed does not simply plan cosmetic corrections of the course. Warsh pronounced at recent hearings in the Senate (April 21) a key phrase, which is obliged to make every portfolio manager shudder. While the nominee has focused on the theoretical necessity of reform, it is essential to model how such a transition would interact with the current market architecture.

He declared openly about the necessity of a "regime change" in the policy of the central bank.

His ideology is built on a harsh critique of the actions of the Fed after 2020. Warsh considers the bloated balance of the regulator an absolute evil, which distorts market mechanisms, suppresses the pricing of risk, and helps exclusively large owners of assets, allowing the government to borrow cheaply and uncontrollably.

Based on an analytical projection of Warsh’s stated goals, we can model a tactical 180-degree U-turn of the policy of the Fed.  If the Powell administration conducted a policy in recent months of “expensive rate + hidden printing of money,” then Warsh intends to realize a mirror scenario: “cheap rate + shrinking balance sheet.” Fulfilling the political order of Donald Trump on the lowering of the cost of borrowing, the new head of the Fed perhaps intends to compensate for this by an aggressive compression of the balance.

To understand why this will become a shock for the system, it is needed to glance behind the curtains of the leaving epoch.

Anatomy of the Leaving Epoch: The Trick With Short-Term Bills and Hidden Liquidity

From 2008, after the launch of the first programs of quantitative easing, the global financial system mutated. We transitioned from a scarce reserves framework to an abundant reserves framework. The base percentage rate of the Fed most likely lost its original function in this paradigm. Earlier the rate was the real cost of "primary" money: banks came to the discount window of the Fed and borrowed liquidity, launching the credit multiplier.

Today, when trillions of printed dollars are sloshing around in the system, the source of which is the balance of the Fed, it is simply not needed for banks to borrow at the regulator. The volume of direct credits constitutes right now a negligible $5.8 billion at a balance of $6.7 trillion. The rate began to bear a purely psychological character and to act as an instrument of regulation of the speed of circulation of money, but not its quantity. The rate did not render a direct influence on the pouring of money into the economy for almost 18 years—the printing press called the shots and the size of the balance.

Exactly on the balance of the Fed in the last months, the main drama unfolded, which Powell skillfully hid behind harsh hawkish rhetoric. Glance at the data: still on Dec. 10, 2025, the volume of short-term treasury bills on the balance of the Fed constituted a miserable $195.4 billion. However, by April 22, 2026, this volume rapidly flew up to $425.2 billion.

What does this mean in practice?

The Fed released onto the market almost $230 billion of fresh "short" money over several months. For what? Because the market of REPO—the lifeblood of Wall Street—began to critically dry out. The U.S. Treasury aggressively sucked out liquidity from the system for the covering of a gigantic budget deficit, and the remainders in the mechanism of reverse REPO collapsed practically to zero.

To prevent the system from seizing up, the Fed was forced to conduct “QE through the back door.” In rhetoric, they fought inflation; in reality, they saved the budget and flooded the system with raw liquidity, acting in the role of the ultimate backstop. Exactly this artificial safety net Kevin Warsh plans to destroy, returning markets to the laws of natural selection.

New Reality of Warsh: Return to Deficit and a Real Market

By stress-testing the implications of the nominee's stated framework, we can outline a return to the classic "Corridor System" which worked until 2008. In that old reality, the balance of the Fed was compact, and there was exactly as much liquidity in the banking system as is necessary for everyday calculations. Warsh intends to compensate for the lowering of the percentage rate—which President Trump so expects from him—by a radical and harsh reduction of the balance.

That is to finish the epoch of QE.

What is the final goal?

To return the percentage rate to its “true” market meaning. When the ocean of excess money dries out, banks will no longer be able to simply sit on reserves and earn a risk-free return from the Fed. It will come to them again to fight for liquidity on the interbank market. The credit multiplier will restart in its classic form. The financial system will credit according to real economic necessity and not simply absorb the monetization of the state debt. Money can become cheaper nominally, but there will physically be less of it, probably.

Consequences for Markets: Life Without a Safety Net

In my analytical model of this transition, the impact on professional investors could be a profound shock. We step into the epoch of the death of the famous “Fed Put”—the unspoken guarantee that the regulator will come to help at any serious market decline. From 2008, Wall Street was addicted to liquidity. Any crisis was flooded by printed money. Bears, attempting to play on lowering, were simply steamrolled by fresh money printing, and the general "buy the dip" strategy worked, for the most part, without fail. As a result, indices skyrocketed, and the multipliers of technological giants like Nvidia (NVDA) or Microsoft (MSFT) bloated to historical maximums. Excess capital needed a place to park.

The return to the orders of the pre-2008 era means that liquidity will again become volatile. It will jump not from the decisions of the Fed, but from real market conditions: seasons of tax payments, Treasury auctions, and corporate cycles.

No safety net.

In the new reality, our projection indicates that drawdowns of indices of 20-30%, which in the epoch of Powell were perceived as an absolute catastrophe, will again become a normal, routine process of correction. Bulls will be deprived of their main trump card—the large balance of the Fed—and bears will receive, for the first time in over a decade and a half, a chance at systemic victories. The market will transition from the phase of "growth on liquidity" to the phase of “growth on efficiency,” where most likely only companies with a real cash flow will survive, and not simply beautiful presentations.

Conclusion: The Fed as a Field of Battle and the Uncertainty of the “Epoch of Changes”

The change of the head of the Fed—this is seemingly not simply a rearrangement of nameplates. This is an attempt at dismantling a system built for decades. It is crucial to clarify that the scenarios presented in this analysis are based on professional modeling of potential risks rather than a definitive statement of the Fed's future actions.

In practice, however, his path will perhaps not be strewn with roses. The Federal Reserve System is not a monarchy but a complex bureaucratic organism. Even if Warsh will officially step into the post in the middle of May, he will find himself one-on-one with the "old guard" (including Powell, who says he'll stay on the Fed board despite, or because of, Trump's attacks). The Committee on Open Markets consists of people whose careers and worldview are inseparably tied with the epoch of excess liquidity. For them a 180-degree U-turn—this is probably a sacrilege.

We should be prepared to see the Fed turn into yet another political battlefield. The resistance of the system will be colossal, and the victory of the new head is not at all guaranteed. The probability is great that instead of a clear course, the market will receive a harsh internal confrontation, where every decision will be received "with a fight".

A famous Chinese curse comes to mind here: “May you live in interesting times.”

The financial world steps into such an epoch. We do not know who will exit a winner out of this fight, but we exactly know that the upcoming months and years will be extremely complex and turbulent.

This is all precisely why the outcomes of the April meeting of the Fed today have zero significance. What's the point? What exactly did the departing leadership of the Committee do at this meeting if tomorrow the new guy tosses it all out? It is time for markets to cease analyzing boring press releases of Powell and to begin to prepare for a large institutional war. The historical cycle of "free money" approached the end, but the path to a new normalcy promises to be extremely painful.

Note on Methodology: The conclusions and scenarios presented in this article are based on analytical modeling of publicly stated policy goals. They represent a professional projection of market implications and potential risks associated with a transition from an abundant to a scarce reserves framework.