Kevin Warsh, set to become Federal Reserve chair, has expressed a strong preference for reducing the Fed's asset portfolio, which ballooned from roughly $800 billion pre-2008 to nearly $9 trillion at its 2022 peak. Market observers and Fed officials are now debating the pace and feasibility of further quantitative tightening, with some arguing hard structural limits exist given Treasury market depth and bank reserve requirements. The discussion is intensifying as the balance sheet remains near $7 trillion.
For Armada's traditional repo desk, aggressive balance sheet runoff reduces the reserves that banks park at the Fed and recycle into repo markets. Fewer reserves tighten secured funding conditions, widen SOFR-RRP spreads, and can produce the kind of September 2019-style repo dislocation that spikes overnight rates. Counterparties including MMFs and hedge funds will reprice access to cash accordingly.