Kevin Warsh’s Fed Moment

Originally published on Substack. 

​Kevin Warsh has now been sworn in as Federal Reserve Chair, and the timing could not be more important.

Inflation remains a threat. Federal debt keeps rising. The Fed’s balance sheet is still massive. Markets are watching whether Washington will keep using monetary policy to paper over fiscal excess or finally restore discipline.
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Warsh has said many of the right things for years. In his Hoover Institution interview, he argued that the Fed has drifted from its core mandate of price stability, warned about the legacy of quantitative easing, and criticized the central bank’s growing entanglement with fiscal policy. That is exactly the right diagnosis.

Now comes the real test.

Will the Warsh Fed simply manage the same broken framework a little better? Or will it begin the hard work of shrinking the Fed’s footprint, restoring sound money, and ending the central bank’s role as Washington’s fiscal shock absorber?

Inflation Is A Choice

Warsh has been blunt: inflation is not a mystery. It is not a weather pattern. It is a policy outcome.

That matters because too much of Washington still treats inflation as something that happens to policymakers, rather than something policymakers help create. Supply shocks can raise certain prices. Energy disruptions can matter. Wars can matter.

But persistent inflation comes from too much money chasing too few goods and services, often after Congress spends too much and the Fed accommodates it.

This is why I have argued in The Fed’s Latest Move Shows Why the System Must Change and Rules Over Discretion Provide A Path Forward that the Fed needs rules, not vibes. Discretion has given us mission creep, massive asset purchases, distorted markets, and inflationary finance.

The current Fed framework targets 2 percent inflation, but that is not true price stability. It means the dollar loses purchasing power every year by design. A serious reform agenda should move toward a 0 percent inflation target. The goal should be a stable dollar, not a dollar that steadily melts slower than before.

The Balance Sheet Is The Real Story

The Fed’s balance sheet is where the regime change must begin.
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According to FRED’s WALCL series, the Fed held about $6.714 trillion in total assets as of May 20, 2026

Nominal GDP was about $31.856 trillion in Q1 2026. That means the Fed balance sheet is roughly 21 percent of GDP. Before the 2008 policy crisis, the Fed’s balance sheet was 6 percent of GDP.

My North Star is clear: cap the Fed balance sheet at 6 percent of GDP (maybe lower?) and shrink it steadily until it gets there.
At today’s GDP, 6 percent would be $1.9 trillion. That means the Fed would need to shrink by roughly $4.8 trillion from today’s level. That is not a small adjustment. But it is necessary.

A central bank with a balance sheet above 20 percent of GDP is not merely a lender of last resort. It is a market-maker, fiscal enabler, and interest-rate manipulator. It pushes capital toward government debt, distorts risk pricing, rewards leverage, punishes savers, and allows Congress to avoid the consequences of overspending.

That is not neutral monetary policy. That is central planning through the bond market.

How To Shrink It

The Warsh Fed should announce a simple path.

First, stop reinvesting maturing assets. Let short-term Treasuries mature and do not roll them over.

Second, stop holding mortgage-backed securities. Housing finance should not be managed by the central bank.

Third, move the portfolio toward short-term Treasury bills during the transition, then continue shrinking as those mature.
Fourth, publish a schedule that gets the balance sheet to 6 percent of GDP (lower?) within a defined window, with emergency deviations allowed only through transparent congressional authorization.

Fifth, pair the balance sheet rule with a 0 percent inflation target.

That would be a real dual rule: stable money and a shrinking central bank footprint.

Yes, interest rates will likely rise as the Fed stops suppressing them. That is not a flaw. That is the market finally being allowed to speak. Artificially low rates feel good at first, but they create malinvestment, debt addiction, asset bubbles, and inflationary pressure. The medicine is uncomfortable because the disease has been allowed to spread for too long.

Congress Must Stop Feeding The Fed

But the Fed cannot fix Washington’s spending addiction.

The CBO’s latest outlook projects a $1.9 trillion deficit in 2026, rising to $3.1 trillion by 2036. The deficit is projected to grow from 5.8 percent of GDP to 6.7 percent, while debt help by the public rises to 120 percent of GDP by 2036. That is the real source of pressure on the Fed.

There is growing support for a 3 percent of GDP annual deficit target. That would be better than today’s reckless path, but let’s be honest: it is not enough. A 3 percent deficit is still a deficit. It still adds debt. It still assumes Washington should permanently spend more than it collects. It still leaves future taxpayers holding the bag.

The real goal should be a 0 percent deficit with spending less and restraint as the focus.

That means Congress should adopt a sustainable budgeting rule that limits federal spending growth to no more than population growth plus inflation, as I explain in my Sustainable Budgeting for a More Prosperous Economy guide. The problem is not that Americans are undertaxed. The problem is that Washington spends too much.

Spending is the disease. Deficits, debt, inflation, and Fed intervention are symptoms.

Back To Lender Of Last Resort

The Fed should not be an unelected economic czar.

It should not manage climate policy. It should not allocate credit. It should not subsidize housing. It should not rescue Congress from the consequences of overspending. It should not manipulate the yield curve to make debt cheaper than markets would otherwise allow.

At most, while the Fed exists, it should be a narrow lender of last resort for solvent institutions during genuine liquidity crises, following clear rules and transparent limits.

And yes, my long-run North Star remains ending the Fed. There is no need for a central bank to manage a free economy. Money should be sound, markets should set interest rates, and Congress should not have a monetary escape hatch for fiscal irresponsibility.

But as long as the Fed exists, it must be constrained.

That is why my Finance Policy Guide calls for ending the Fed’s role as an unelected economic czar, capping the balance sheet at 6 percent of GDP, banning non-Treasury debt monetization, moving to rules-based policy, and requiring a full independent audit.

Warsh has an opening to move in that direction.

Three Takeaways For Policymakers

1. Make price stability mean 0 percent inflation.

The Fed’s 2 percent target still erodes purchasing power. A stable dollar should be the goal, not slower monetary decay.

2. Cap the Fed balance sheet at 6 percent of GDP.

At roughly 21 percent of GDP today, the Fed’s balance sheet is far too large. Let assets mature, stop reinvestment, end MBS holdings, and shrink toward a narrow lender-of-last-resort role.

3. Fix Congress’s spending problem.

A 3 percent deficit target is better than the current path, but the right goal is balance. Spending should grow no faster than population growth plus inflation, and preferably less.

The Bottom Line

Kevin Warsh has said the Fed needs reform. Now he has the chair.

The task is not to manage the old system more politely. The task is to change the regime.

Shrink the balance sheet. Target 0 percent inflation. Stop enabling Congress. Let interest rates reflect real market conditions. Restore the Fed to a narrow lender-of-last-resort role until the country is ready to eliminate it altogether.

Sound money is not optional. It is the foundation of affordability, investment, savings, and liberty.