A great unwinding

Summary: The US Federal Reserve is preparing to drain trillions from its balance sheet — but unwinding a decade of monetary engineering is proving far harder than building it. A look at why the plumbing keeps seizing up, and how the pace of the Fed's retreat reaches all the way to Dalal Street.

Summary: The US Federal Reserve is preparing to drain trillions from its balance sheet — but unwinding a decade of monetary engineering is proving far harder than building it. A look at why the plumbing keeps seizing up, and how the pace of the Fed's retreat reaches all the way to Dalal Street. For any serious equity investor, the balance sheet of the United States Federal Reserve (Fed) is one of the most powerful, if least visible, drivers of global asset prices. After more than a decade of quantitative easing (QE), or the large-scale purchase of bonds to inject money into the system, deployed against the 2008 Global Financial Crisis and again during the Covid pandemic, the Fed’s holdings ballooned to historic highs. Even after years of runoff, they sit near $6.7 trillion, roughly 21 per cent of the US’s gross domestic product. Under new Chair Kevin Warsh, who succeeded Jerome Powell in May 2026, the Fed is contemplating a ‘regime change’: a deliberate, aggressive shrinking of this portfolio. The ambition collides with hard mechanics. When the Fed last tried to shrink, a process known as quantitative tightening (QT), it was forced to halt in late 2025 as money-market plumbing seized up and overnight rates threatened to spike. Unwinding a decade of monetary engineering, it turns out, is far harder than building it. Why drain the tank at all? Three rationales dominate the case for a smaller Fed. Restoring traditional policy: A lighter footprint lets interest rates, not bond buying, do the work and reduces the distortions a giant state buyer imposes on markets. Rebuilding ‘policy space’: A smaller balance sheet is dry powder. Future crisis-fighting expansions are more effective and more politically palatable when they start from a lower base. Existing credit allocation: The Fed still holds nearly $2 trillion in agency mortgage-backed securities (MBS), or bonds backed by home loans, which effectively channels subsidised credit into housing. Critics argue the

This article was originally published on July 01, 2026.