Citi Analysis: Powell May Take Gradual Approach to Shrinking Fed Balance Sheet

Powell Likely to Favor Gradual Balance Sheet Reduction

A recent report from Citi suggests that if Jerome Powell becomes the next Fed Chair, he is expected to pursue a measured approach to shrinking the central bank’s $6.6 trillion balance sheet. This strategy aims to avoid repeating past tightening missteps that led to liquidity strains in financial markets.

Shifting Treasury Maturities as a Key Tactic

Analysts noted that one of the most viable tactics would be rolling over long-term bonds into shorter-term debt, effectively reducing the average maturity of the Fed’s holdings. This would help manage market impact and preserve policy flexibility.

Alternative Paths to Shrinking the Balance Sheet

• Reduce the current $40 billion monthly Treasury purchase pace or halt altogether
• Allow mortgage-backed securities (MBS) to roll off naturally as they mature
• Increase issuance of interest-bearing bonds to stabilize market liquidity

Citi forecasts that an increase in interest-bearing bond issuance could begin as early as November 2026, though a delay until February 2027 remains a possibility depending on market conditions and policy coordination.