Citi Analyst: Powell May Take Gradual Approach to Fed Balance Sheet Reduction

BlockBeats News, February 10th: A strategist at Citigroup said that Federal Reserve Chair nominee Kevin Warsh may take a gradual approach to shrinking the central bank's $6.6 trillion balance sheet to avoid reigniting market turmoil.

Citi strategists Alejandra Vazquez Plata and Jason Williams believe that the Fed under Warsh still has options to reduce its footprint. By rolling over longer-dated Treasury holdings into short-term debt as the "path of least resistance," it can shorten the weighted average maturity of its holdings. The incoming Chair may seek consensus among policymakers while prioritizing garnering committee support for rate cuts.

Additionally, the Fed could choose to slow its monthly purchases of around $40 billion in Treasuries or halt them altogether. Other options include allowing its holdings of mortgage-backed securities to naturally shrink as they mature. Citi expects an increase in coupon-bearing bond issuance to start in November 2026, with a risk of delay until February 2027. (FXStreet)