WARSH: BIG BALANCE SHEET IS A REASON FED IS IN POLITICS || NEED SMALLER BALANCE SHEET SLOWLY, DELIBERATELY

Federal Reserve Governor Christopher Waller (WARSH) emphasized that the central bank's large balance sheet has contributed to its increased political scrutiny, arguing for a gradual and deliberate reduction in its size. The transmission mechanism centers on balance sheet normalization affecting term premiums and long-end yields, with implications for duration risk and Treasury market functioning. A smaller balance sheet could reduce the Fed’s footprint in markets, potentially easing political pressure while altering liquidity conditions in money markets and agency MBS. Traders will watch upcoming FOMC minutes and the pace of balance sheet runoff adjustments as key signals of policy intent.

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