New Delhi, March 26 -- Kevin Warsh, the former Federal Reserve governor nominated by President Donald Trump to lead the central bank, has made shrinking the Fed's roughly $6.7 trillion balance sheet a central part of his vision for monetary policy.

In speeches and interviews, Warsh has argued that years of bond buying have left the Fed too deeply embedded in financial markets, distorted capital-markets prices, and pulled the central bank into a role it wasn't designed to assume. A smaller balance sheet, in his view and that of his supporters, would help restore discipline and reduce the central bank's footprint.

But shrinking the balance sheet may be difficult to achieve. Over the past decade, banks, money-market funds, and the Treasury...