What will Kevin Warsh’s nomination mean for monetary policy and possible structural change?
In a widely anticipated move, US President Donald Trump announced on January 30 his intention to nominate Kevin Warsh as the next chair of the Federal Reserve. Markets have generally viewed Warsh as a safe choice based on his experience as a member of the Fed Board of Governors from 2006 to 2011 and subsequent career in finance and public economics.
Warsh has been widely praised for his liaison work between the Fed and Wall Street while serving as a Fed Governor during the global financial crisis, but his record on monetary policy is less highly regarded. As the economy struggled in the wake of the crisis, Warsh was primarily concerned about the risk of inflation—even as unemployment pushed near 10%—and indeed, over the next decade the primary policy concern turned out to be inflation consistently running below target.
Hawkish Monetary Policy Reputation…with Nuances
If the Senate confirms Warsh, he’ll take the open governor’s seat and become chair when Jay Powell’s term ends in May. Warsh is considered a monetary policy hawk based on his views when he was on the Board of Governors and most of his public remarks since. That said, he has advocated rate cuts recently based on his view that tariffs won’t cause lasting inflation.
Warsh’s recent pivot on rates does leave some question about his independence, but he has generally couched his argument in economic terms. Because he’s generally credible, we expect that he’ll be able to persuade the Federal Open Market Committee (FOMC) to cut rates later this year. We believe that his nomination makes modest easing more likely; we expect 50 basis points of rate cuts in 2026. At the same time, his nomination makes irresponsible rate cuts less likely, and we don’t think that his appointment demands an added risk premium in asset markets.
A Focus on Longer-Term Fed Reform
The most consistent through line in Warsh’s public commentary has been his belief that the Fed’s balance sheet is too big. He was skeptical of quantitative easing in his time at the Fed, and that hasn’t faded. In shorthand, he views the Fed’s balance-sheet policy as an enabler of irresponsible fiscal policy.
While we have some sympathy for his view, the process of shrinking the Fed’s balance sheet without disrupting markets and the economy would be very difficult, as demonstrated by the money-market turbulence in 2019 as the balance sheet shrank. Making the balance sheet meaningfully smaller would likely require a structural change in the way the Fed implements monetary policy. We expect Warsh to take a measured approach to such a significant change; doing otherwise would be irresponsible and out of keeping with his history of measured analysis.
In other areas, Warsh could have more near-term impact. He has long called for the reform of Fed regulatory policy, staffing and research focus. Specifically, he believes that regulatory policy toward banks is too strict and that researching issues like the impact of climate change on the economy is too distant from the central bank’s congressional mandate. Much of the reform that Warsh has advocated is already underway within the Fed; he would likely be able to accelerate policy tilts toward deregulation and a smaller, more focused research staff.
A Legacy Likely to Be Defined by Structural Change
In the long run, Warsh’s legacy as Fed Chair will likely come down to how he guides the FOMC through structural changes, not cyclical ones. The market zeroes in on cyclical trends, but structural changes will define the US economy over the long term.
There are plenty of open questions to address. For example, if AI boosts productivity, it should enable more growth with less inflation. How quickly should the Fed take that into account? How much evidence does it need? Would it argue for lower rates? Or would higher potential growth argue for a higher neutral interest rate? Is crypto a competitor to the Fed’s monetary supremacy or a complement? Should it be regulated? How and by whom?
Warsh certainly seems confirmable by the Senate, and we expect that he eventually will take office. That process may be delayed, however, by the ongoing criminal investigation of Powell related to the oversight of building renovations. Several senators have said they won’t approve any Fed nominee until that investigation is dropped.
And, of course, who chairs the Fed matters only insofar as the institution stays independent; the Supreme Court has yet to rule on two such cases. If it doesn’t protect Fed independence, the identity and preferences of the next chair won’t matter much at all—presidents unhappy with the Fed could simply fire its officials until they get the policies they want. We fervently hope that this doesn’t come to pass.
