The Warsh Pivot

From Fed QE to Treasury QE

Despite the recent uptick in US Fed Liquidity, presumptive Fed Chair Kevin Warsh—encouraged by Treasury Secretary Bessent—has signalled a clear intention to shrink the central bank’s balance sheet. This quantitative tightening (QT) pivot, reportedly aligned with the views of prominent investors like Stanley Druckenmiller, marks a decisive departure from the post-crisis era of unconditional monetary support.

The Bank Reserve Threshold Problem

Yet, we figure that the future for US Fed Liquidity will turn out ‘grey’, falling between these QT and QE regimes. Thus, projections of US bank reserves through 2026, derived from estimated Fed Liquidity, suggest reserves will at best flat-line close to the ‘minimum’ or ‘adequate’ threshold—a level established by comparing past periods of repo market stress. Any attempt by the FOMC to push liquidity meaningfully lower risks colliding with the structural demands of the financial system, as evidenced by the recent repo market turbulence in late 2025.