Shrinking Fed’s Balance Sheet Will Take Years, Barclays Says

The Federal Reserve’s transition to a smaller balance sheet will require significant coordination between the central bank and Treasury Department to prevent excess market volatility, according to Barclays strategists.

The process will result in tighter financial conditions, which Chair nominee Kevin Warsh — who has called for dramatically paring back the $6.6 trillion portfolio — may have to offset with a lower policy interest rate, they wrote.

“Balance sheet normalization will be a multiyear process,” Barclays strategists Anshul Pradhan, Samuel Earl and Demi Hu wrote. “Given Warsh’s desire to shrink the balance sheet, and the fact that the Fed ...