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Kevin Warsh and the Monetary Base

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The Fed’s balance sheet grew to about $9 trillion after the financial crisis and still remains high at around $6.7 trillion, a primary concern for Fed chair nominee, Kevin Warsh, who proposes faster bond sales to reduce the size of the Fed’s balance sheet.—wsj.com

The Questions

  1. Who is Kevin Warsh?
  2. What is the Fed’s balance sheet?
  3. What is Kevin Warsh’s primary concern?
  4. How did the Fed grow its balance sheet?
  5. How can the Fed shrink its balance sheet?

The Answers

  1. Who is Kevin Warsh?

Kevin Warsh is a former Federal Reserve Governor and, in May 2026 was appointed to the position of Fed Chair.

  1. What is the Fed’s balance sheet?

The Fed’s balance sheet is a statement of the Fed’ assets and liabilities. The Fed’s assets are U.S. government and private securities and its liabilities are currency and reserves of banks and other depository institutions—the monetary base.

  1. What is Kevin Warsh’s primary concern?

 Kevin Warsh’s primary concern is the very large size of the monetary base.

  1. How did the Fed grow its balance sheet?

Quantitative easing (QE) carried out in three main rounds starting after the financial crisis (November 2008) and continuing until COVID-19 period, expanded the Fed’s balance sheet and monetary base to about $9 trillion by 2022.

  1. How can the Fed shrink its balance sheet?

The Fed can shrink its balance sheet with quantitative tightening (QT), which decrease the Fed’s assets and bank reserves by the same amount. The reserves disappear in the same way they were created—back into thin air.

Now take a short quiz to ensure you understand what you just read.

Answer the following questions to check your understanding of the story.

What is monetary base?

Wrong! - Customer deposits with the bank, including checkable deposits, are not a part of the monetary base. Money supply is broader than monetary base and excludes reserves.

That's Right! - The monetary base = currency (notes and coins held by the public) + reserves (deposits banks hold at the Fed).

What is Kevin Warsh’s main concern?

Wrong! - Warsh’s concern is the large size of the bank reserves, not the large size of the currency or money supply.

Well Done! - Kevin Warsh’s main concern is the large size of the bank reserves which has increased the monetary base, an outcome of Fed’s policy in the past.

What is the cause of a higher monetary base?

___________ which the Fed pursed in the past by ___________.

Wrong! - Fed didn’t buy short-term securities. It bought long-term securities. Allowing bonds to mature or selling government bonds decreases reserves, which decrease the monetary base.

Correct! - Quantitative easing increased the monetary base because the Fed bought long-term government securities and paid for them by creating bank reserves electronically.

How does Warsh propose to decrease the monetary base?

 

Warsh proposes ___________ by __________.

Wrong! - Allowing bonds to mature decrease reserves but pursuing quantitative tightening this way is too slow to address Warsh’s concern. Quantitative easing increases the monetary base. Selling securities is quantitative tightening, not easing.

Good Job! - When banks sell government bonds, they pay using reserves and the monetary base decreases. This is the quantitative tightening Warsh proposes.

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