Even Kevin Warsh can't solve the quandary of balance sheet reduction: with unchanged underlying rules, whoever takes the helm faces the same challenge [Master Cheng's Lecture 3.6]

Many people expect that after Kevin Walsh takes office, the Federal Reserve will restart balance sheet reduction and tighten liquidity.

But in the last two rounds of balance sheet reduction, both ultimately hit the same wall.

It happened in 2019;

It will happen again in October 2025.

Why? Because the end point of balance sheet reduction has never been just about what the Federal Reserve “wants.”

The real determinant is the minimum reserve requirement of large banks.

Once reserves drop to a certain level, banks will suddenly stop lending money to the market, repo rates will spike rapidly, and a “liquidity crunch” will follow.

And this bottom line is not something Powell, Walsh, or any Federal Reserve chair can change with a single statement.

Behind it are tied:

LCR, SLR, living will requirements, internal risk controls, and the entire financial regulatory system.

This is also why Stephen Miran puts “removing the stigma effect of the discount window” as the first item in his reform plan.

Because if the underlying constraints of the banking system are not changed, whoever does the balance sheet reduction may ultimately run into the same outcome.

In this section, Tank Road Macro founder Cheng Tan will systematically break down:

Why is the end point of balance sheet reduction essentially a “physical wall”?

Why does the more the Federal Reserve tries to “retreat behind the scenes,” the harder it is to truly exit the market?

And what is the most fundamental internal contradiction in the dollar liquidity system?