QE or Net QT in the Warsh Era?

Investing.com -- Wolfe Research said the arrival of Kevin Warsh at the Federal Reserve will create a complex balance-sheet outlook, with both dovish and hawkish scenarios plausible as President Donald Trump prioritises housing affordability.

Analyst Tobin Marcus wrote in a note to clients that “various forms of both QE and QT look plausible,” noting that Trump is already conducting a “novel form of quasi-QE” through $200 billion in GSE mortgage-backed securities purchases, while the Powell Fed has pivoted to modest reserve management purchases designed to keep bank reserves “ample” and ease funding strains.

At the same time, Marcus highlighted that Warsh’s “longstanding calls for a smaller, simpler Fed balance sheet suggest he may pursue QT.”

Yet Wolfe Research believes the starting point is a broadly steady federal footprint in bond markets, with Treasury Secretary Bessent aiming for GSE purchases to “match the runoff of ~$15b per month” in Fed MBS and reserve purchases offsetting deficit growth.

On dovish possibilities, Marcus stated that Trump could expand GSE MBS purchases, but with diminishing effects, stressing that while limits can be raised, “the crucial difference between the Fed and the GSEs is that the Fed can print money, whereas the GSEs would need to finance purchases.”

FHFA leadership has also “denied reports about expanded MBS purchases.”

Hawkish options appear unlikely. Marcus wrote that “material QT… would put upward pressure on the long end of the yield curve,” conflicting with Trump’s goals, and risks reigniting funding strains.

Wolfe Research concluded that despite the rhetoric, “we’ll get little meaningful balance sheet movement” and that 10-year yields and consumer rates are likely to remain “stickily high.”

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