Wall Street strategists suggest that Kevin Warsh, nominated by Trump for Federal Reserve Chair, has several options to reduce the central bank's $6.6 trillion balance sheet, but the process would be costly and time-consuming.

Warsh has previously advocated for a significant reduction in the Fed's market interventions, fueling discussions about the scale of its investment portfolio. Following multiple rounds of crisis-driven asset purchases, the Fed's holdings have expanded substantially. The minutes from the January policy meeting, scheduled for release on Wednesday, may reveal policymakers' latest views on the balance sheet.

Jeffrey Schmid, President of the Kansas City Fed, stated last week that a large portfolio could blur the lines between monetary and fiscal policy. Michelle Bowman, the Fed's Vice Chair for Supervision, has also argued for shrinking the balance sheet.

Strategists note that available options include easing regulatory requirements that encourage banks to hold large cash reserves at the central bank, or shortening the average maturity of the Fed's holdings. The Fed could also halt purchases of Treasury bills or even sell securities outright.

A less likely path would be resuming balance sheet reduction, known as quantitative tightening. The central bank abandoned this process in December due to increased pressure in money markets from rising government borrowing. Subsequently, the Fed shifted to purchasing Treasury bills to replenish reserves in the system.

Regardless of the path taken under Warsh's leadership, the process could take years. "I think this is something that would happen no earlier than 2027," said Seth Carpenter, Global Chief Economist at Morgan Stanley and former Deputy Director of the Fed's Division of Monetary Affairs.

Jonathan Cohn, Head of U.S. Interest Rates Strategy at Nomura Securities International, added that any such move would also require agreement from Treasury Secretary Scott Besson.