Strategists at Citigroup indicated that Kevin Warsh, the nominee for Federal Reserve Chair, is likely to pursue a gradual reduction of the central bank's approximately $6.6 trillion balance sheet to avoid reigniting stress in money markets. The analysis noted that any move to restart quantitative tightening (QT) could again put pressure on the roughly $12.6 trillion repurchase agreement market. Citigroup stated that the Fed paused its balance sheet runoff last December precisely because repo rates had surged significantly; this market is a core venue for banks to engage in short-term borrowing to meet daily liquidity needs. Strategists Alejandra Vazquez Plata and Jason Williams wrote in a report that, given the significant volatility experienced by the repo market last year, the threshold for restarting QT is "very high." Policymakers clearly prefer to avoid a repeat of the October 2025 stress episode and are opting for a more measured path of balance sheet management. Warsh, a former Federal Reserve Governor, has long advocated for a substantial reduction in the central bank's financial footprint. Following asset purchase programs during the global financial crisis and the COVID-19 pandemic, the Fed's balance sheet ballooned to a peak of $8.9 trillion in June 2022, a significant increase from approximately $800 billion roughly two decades prior. Later last year, as increased government borrowing combined with the effects of balance sheet reduction drained liquidity from money markets, the Fed halted the runoff and instead began purchasing Treasury bills monthly to replenish reserves in the system. However, Citigroup believes that, under Warsh's leadership, the Fed still has several options for "deleveraging." The path of least resistance would be to lower the weighted average maturity of its holdings by rolling over maturing longer-term Treasuries into shorter-term debt. The strategists also noted that Warsh might prioritize building consensus on the committee for interest rate cuts while proceeding cautiously on balance sheet management. Other available measures include reducing the current Treasury bill purchase pace of about $40 billion per month, or even halting it entirely, or allowing mortgage-backed securities (MBS) to roll off the portfolio naturally as they mature. Analysis from Citigroup suggests that even if the Fed ends purchases as early as June, reserve levels are unlikely to decline significantly before December 2026. Their baseline scenario involves reducing the monthly purchase pace to around $20 billion starting in mid-April and maintaining that pace throughout the year. Furthermore, the New York Fed's Open Market Desk anticipates that reserve management purchases will remain elevated in the coming months to offset a significant increase in non-reserve liabilities during the April tax season; subsequently, the overall purchase pace could slow noticeably. Minutes from last December's Federal Open Market Committee (FOMC) meeting also indicated that participants favored concentrating purchases on Treasury bills, allowing the Fed's asset portfolio to gradually align more closely with the structure of outstanding Treasury debt. Citigroup also pointed out that the Treasury Department might welcome additional demand for Treasury bills from the Fed, potentially leading it to rely more heavily on short-term debt issuance and postpone increases in longer-term coupon bond sales. Based on this assessment, Citigroup expects any increase in coupon bond issuance could begin as early as November 2026, with a risk of delay until February 2027.