Kevin Warsh has spent the past 15 years harshly criticizing the Federal Reserve for being excessively large, mismanaging inflation, and suffering from compromised independence. Now, as Donald Trump's nominee for the next Fed Chair, he will have to confront and resolve these very issues himself.
On January 31, Greg Ip, the chief economics commentator for The Wall Street Journal, pointed out that if his appointment is confirmed, Warsh will face three delicate balancing acts: shrinking the Fed's balance sheet without disrupting markets, forcing inflation back down and stabilizing it at 2%, and avoiding presidential intervention that would undermine the central bank's independence throughout the process.
Each task is far more difficult than it sounds.
Warsh served as a Fed Governor from 2006 to 2011, participating in the response to the global financial crisis under Ben Bernanke. He ultimately resigned in opposition to the "quantitative easing" (QE) policy.
QE worked by purchasing trillions of dollars in bonds and flooding the banking system with reserves to suppress long-term interest rates. Between 2008 and 2022, the Fed's asset footprint ballooned from $900 billion to $9 trillion; although it has since receded, it remains at a hefty $6.6 trillion, which Warsh still views as excessively large.
Warsh believes this policy distorted market signals, enabled fiscal deficits, and ultimately fueled higher inflation.
“Every time the Fed acts, it increases its own size and power,” he stated last April, “Debt accumulates, capital allocation becomes more distorted, and institutional boundaries are crossed again and again.”
This perspective finds an echo in Treasury Secretary Scott Bessent, who has accused the Fed of "mission creep" and being an "institutionally bloated" organization.
However, shrinking the balance sheet is not without its costs.
Firstly, the banking system now relies on abundant reserves to maintain funding and market functioning. Precisely for this reason, the Fed halted further balance sheet reduction at the end of last year.
Secondly, selling bonds could push up long-term yields, which would in turn increase mortgage rates—a move that would directly anger Trump, a proponent of low interest rates.
Warsh's nomination comes as core inflation in the United States remains near 3%, significantly above the Fed's 2% target.
He will not only need to devise a plan to lower inflation but must also persuade the 12-member Federal Open Market Committee (FOMC) to accept it.
Unlike Jerome Powell, who has a background in economics, Warsh's expertise lies in law and finance. He frequently dismisses mainstream macroeconomic models and the "economics guild" behind them, preferring to explain inflation through indicators like commodity prices, stock values, and money supply.
This unorthodox view has sparked market concerns about internal conflict at the Fed. Warsh has hinted at the need for a radical overhaul of the institution, stating bluntly last July:
“What we need is a regime change at the Fed… It's not just about the chair, it's about a series of people. You have to break the old structure, even 'breaking some heads'.”
Former Fed Vice Chair Don Kohn noted that while he agrees with some of Warsh's criticisms, he disagrees with his "acerbic tone."
However, Nellie Liang, a former Fed official, believes Warsh might be more inclusive than his rhetoric suggests, suggesting he would not be bound by staff models but would not completely disregard professional opinion either.
For the markets, Warsh might have some short-term luck, as easing tariff and housing pressures should help push inflation lower this year.
But if the tide turns, Warsh will need an inflation framework that can both convince the markets and earn the trust of his FOMC colleagues.
Warsh's supporters argue he is more independent than another contender, White House adviser Kevin Hassett. But the reality is that his appointment comes from a president who has publicly questioned central bank independence.
Trump has reportedly made significant interest rate cuts a condition for the nomination, and Warsh appeared to迎合 this demand last October, declaring, “We can lower rates significantly, making the 30-year fixed-rate mortgage affordable again.”
Yet, the most challenging aspect of monetary policy is adjusting rates based on incoming data. If inflation rebounds and the data dictate that the Fed should not cut rates, or even hike them, would Warsh dare to defy Trump?
At Davos, Trump remarked, “It is amazing how people change once they get that job,” signaling his concern that Warsh might become "disobedient" after taking office.
Trump's attacks on Jerome Powell—including allowing a criminal investigation and attempting to fire a governor—have already demonstrated that he will not stand idly by if a Fed Chair disappoints him.
While the Supreme Court might limit a president's power to dismiss the Fed Chair, Trump could still make Warsh's life difficult through public attacks and by appointing compliant governors.
Warsh has acknowledged the importance of independence, stating, “I read the papers about how mean politicians are to central bankers. Well, grow up. Be tough. What's the secret to central bank independence? Deliver. Do your job.”
For investors, whether Warsh can hold the line between Trump's political pressure and the Fed's data-driven mandate represents the most significant tail risk for markets in the coming years.
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