Fed balance sheet - More work to do

The issue that has been important to Fed Chairman Warsh has been the Fed balance sheet. There still isn't enough focus on the dynamics of changes in the balance sheet, inflation, and credit. Total Fed assets are still more than 6 times higher than before the Great Financial Crisis, which was well over 15 years ago. Now, Fed regulatory rules have changed, so the total assets may be much higher for a normal state, but what is the proper number is still. not clear. We do know that over $8 trillion is too high, and more than 25% of GDP is also too high; yet, given inflation is still above target, we should see the balance sheet reduced further. The RMP program is going to zero, which will take out the small blip in 2026, but there is more work. Mortgages will roll off slowly given the low prepayment rates, but that is only a small portion, and the Fed is currently buying bills with the cash flow. There is reluctance to sell Treasuries given the Treasury's strong financing needs. 

To solve the inflation issue, the Fed will need to further reduce its balance sheet.