Analysts at Morgan Stanley are pushing back on the idea that the Federal Reserve would undergo rapid or dramatic change if Kevin Warsh becomes the next Fed chair.

While Warsh has long been vocal about reducing the Fed’s footprint in financial markets—especially its massive balance sheet—economists say the reality is far more constrained. According to Morgan Stanley, even a philosophically different Fed chair would face structural limits that make fast change unlikely.

Warsh has criticized three main areas: the size of the Fed’s asset holdings, what he sees as blurred lines between monetary and fiscal policy, and a communication strategy that can move markets too aggressively. But analysts stress that turning those views into policy would take years, not months.

The biggest roadblock is bank reserve demand. Although the Fed has already reduced its balance sheet from roughly $9 trillion to about $6.6 trillion, most of that reduction came from trimming overnight reverse repo facilities. Actual bank reserves—the lifeblood of short-term funding markets—have barely declined.

Shrinking the balance sheet further would start pulling reserves out of the system, risking a shift from an “ample” reserve environment to a scarce one. That transition could drive up short-term rates and destabilize money markets, something the Fed is determined to avoid.

Post-2008 regulations make this even harder. Banks are now required to hold large liquidity buffers under rules like the Liquidity Coverage Ratio. Lowering reserve demand would mean loosening those safeguards, increasing vulnerability during future crises. As Morgan Stanley put it, there’s no free lunch.

Mortgage-backed securities are another constraint. With refinancing activity muted by higher mortgage rates, the Fed’s MBS holdings are running off at a very slow pace. Analysts estimate it could take close to a decade just to cut those holdings in half organically. Active sales are unlikely, given the potential damage to housing markets and financial stability.

The bottom line is simple: even with a new Fed chair and a new philosophy, meaningful change would unfold gradually. Structural realities—not leadership headlines—will continue to shape how the Federal Reserve operates.

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