Compared to the current Federal Reserve system, Warsh represents three most significant potential shifts: a transformation in the decision-making mechanism, a new inflation theory, and opposition to excessive quantitative easing (QE) coupled with support for balance sheet reduction. Ultimately, whether this proves successful and its medium-term impact on dollar-denominated assets may not hinge on the identity of "Warsh" himself, but rather on the materialization of the US productivity boom narrative.
Who is Kevin Warsh, and what are his main policy stances? Judging by his identity and career background, Warsh is a former Federal Reserve Governor, a multi-talented elite across three fields, and considered "one of Trump's own." 1) He is Jewish and holds a J.D. (not an economics professional). 2) His career spans government, business, and academia. He served in the George W. Bush administration, became the youngest Governor in Fed history at age 35, and is a practical expert from the financial crisis (participating in the 2008 rescue efforts and decision-making). He has Wall Street experience, having been a senior executive in Mergers & Capital Markets at Morgan Stanley, and has also held roles as a researcher and lecturer at Stanford University for many years. 3) Donald Trump has publicly praised Warsh on multiple occasions; Warsh's father-in-law is a long-time friend of Trump and a major Republican donor.
From a policy inclination perspective, Warsh appears more as a flexible pragmatist, a critic of excessive QE (supportive of balance sheet reduction), and a Fed reformist. 1) He shows flexibility on inflation; while once known as an "inflation hawk," he has recently supported faster interest rate cuts without worrying about inflation resurgence. 2) He has been a consistent critic of excessive QE and supports balance sheet reduction. 3) As a Fed reformist, he believes the Fed should be smaller, more professional, and its framework should incorporate a more strategic economic perspective. He advocates using professionalism to safeguard Fed independence and criticizes the Fed's "mission creep." Details are in the main body of the report.
Warsh has not publicly expressed views on major asset classes (such as US stocks, US Treasuries, gold, etc.).
Immediate Impact: Warsh's nomination could be a trigger for a significant adjustment in commodity markets. Warsh's理念 of "using professionalism to maintain Fed independence" might interrupt the non-linear acceleration of the "de-dollarization" narrative, leading to a sharp rebound in the US Dollar Index and a significant adjustment in commodity markets, particularly precious metals. However, the magnitude of this decline might be better explained by the notion that volatility itself is a primary source of volatility. Taking silver as an example, the 1-month at-the-money options implied volatility (simplified as the market's expected annualized price volatility over the next month) has surged linearly from already high levels since January this year, rising from around 55% to approximately 90%, exceeding the level seen in March 2020 by this week. Normal levels are between 20-30%, and it is extremely difficult for the market to sustain such high volatility persistently.
Short-to-Medium Term Impact on Monetary Policy and Markets 1. Change in the Fed's decision-making mechanism. He criticizes the current "data-dependent + forward guidance" framework, arguing that data dependence is too backward-looking, and forward guidance attempts to influence markets through rhetoric, undermining policy prudence and flexibility. He might reduce communication and shift towards a more strategically forward-looking framework, i.e., setting policy based on judgments about long-term economic trends (such as AI-driven productivity boom and deregulation leading to non-inflationary growth).
Short-term impact: Markets have become "addicted" to the Fed's forward communication. Lacking the buffer and "verbal reassurance" of forward guidance, before markets adapt, fluctuations in economic data could actually amplify market volatility.
Medium-term impact: Freed from the constraints of being a "forward guidance prisoner," the Fed's actions could become more flexible (for instance, the 2021 "transitory inflation" view might have delayed the start of the rate-hike cycle). If markets gradually adapt and are "weaned off" the Fed's rhetoric and forecasts, policy at that point might become more predictable (based on actual actions rather than words, avoiding confusion between "dovish/hawkish actions and hawkish/dovish statements"), potentially leading to lower market volatility.
2. New inflation theory. He views tariffs as a one-time price shock that won't cause persistent inflation. The productivity boom driven by AI and deregulation will enhance growth potential, leading to growth without inflation, supporting faster rate cuts without fear of inflation resurgence. This narrative might also form the basis for the more前瞻 strategic framework judgment proposed by Warsh. Currently, the Fed has a consensus on the former (tariffs) but has not reached a public conclusion on the latter (AI/deregulation impact).
Short-term impact: Relatively small; the probability of substantial rate cuts this year is low. Firstly, Warsh supports "faster rate cuts" but has not made statements regarding short-term "substantial rate cuts." Secondly, upon taking office, facing a divided and data-dependent Fed, and without seeing further labor market weakening (declining non-farm payroll additions, rising unemployment rate), Warsh might find it difficult to persuade other "hawkish" FOMC voters and the market (the productivity boom narrative requires time to verify), and it would also conflict with his persona of maintaining Fed independence through professionalism. Thirdly, after Warsh's nomination, rate cut expectations only increased slightly, still pricing in about 2 rate cuts this year.
Medium-term impact: If Warsh leads the Fed to a consensus under this narrative, based on his judgment of a macro trend that "allows for lower rates without triggering inflation," it could further open the door for rate cuts. The impact depends on the US productivity boom transitioning from "narrative" to "reality." If gradually validated, US high growth + low inflation could provide room for balance sheet reduction from the Fed's perspective. More importantly, the narrative of US fiscal deficits would also reverse (expanding tax base + reduced baseline spending), which would be medium-to-long-term positive for US dollar assets. If disproven, this narrative would be fundamentally no different from Powell's "transitory inflation" theory in 2021.
3. Opposition to excessive QE, support for balance sheet reduction. Warsh opposes *excessive* QE and its use as a conventional tool, not QE entirely (he supported QE1 during the financial crisis, viewing it as a "crisis response innovation," but opposed QE2). He supports balance sheet reduction but has not indicated starting it now.
Short-term impact: There is likely no room for renewed balance sheet reduction currently. As US money market rate volatility increased and breached the upper limit of the interest rate corridor in Q4 last year, the Fed halted balance sheet reduction in December and resumed "reserve management purchases" to keep reserves persistently at an ample level, thereby increasing money market liquidity and calming rate volatility. Restarting balance sheet reduction now would most likely only trigger a money market liquidity crisis (like in 2019) and an increase in long-term rates (driven by rising term premiums).
Medium-term impact: Under normal circumstances, room for further balance sheet reduction would depend on additional rate cuts within the productivity boom narrative. If a crisis occurs, QE would likely remain a necessary option, but its scale and duration would probably be weaker than in previous rounds.
Risk提示: Potential fiscal stimulus amid midterm elections; Warsh's views could evolve over time.
Report Main Body 1. Who is Kevin Warsh, and what are his main policy stances? Judging by his identity and career background, Warsh is a former Federal Reserve Governor, a multi-talented elite across three fields, and considered "one of Trump's own." Born in 1970, age 55, Jewish, holds a Juris Doctor. His resume spans government, business, and academia. Government: served as Special Assistant to President George W. Bush, Executive Secretary of the National Economic Council, became a Federal Reserve Governor at 35 (youngest in history), practical expert from the financial crisis (participated in 2008 crisis rescue and decision-making). Business: Wall Street background, former senior executive in Mergers & Capital Markets at Morgan Stanley, understands markets and trading. Academia: Distinguished Visiting Fellow, Shepard Family, Hoover Institution, Stanford University; Visiting Scholar and Lecturer, Stanford Graduate School of Business. Interviewed for Fed Chair in 2017; Trump has repeatedly publicly praised him as "impressive looking" and "very capable"; his father-in-law is a long-time friend of Trump and a major Republican donor; his wife is an heir to the Estee Lauder Group.
From a policy inclination perspective, Warsh appears more as a flexible pragmatist, a critic of excessive QE (supportive of balance sheet reduction), and a Fed reformist. First, he is relatively flexible on inflation. Warsh was once known as an "inflation hawk," but recently believes post-pandemic inflation stemmed from excessive Fed money printing and fiscal overspending (monetarist tint). He currently thinks AI-driven productivity gains and deregulation can boost non-inflationary growth, views tariffs as one-time price shocks, and supports faster rate cuts without worrying about inflation bouncing back. Second, consistently since the financial crisis, a critic of excessive QE, supporting balance sheet reduction. Warsh believes QE made the Fed act fiscally, calls for a new agreement between the Treasury and the Fed to better coordinate balance sheets and reduce federal debt costs, and argues that shrinking the balance sheet would pave the way for rate cuts while avoiding excessive inflation. Third, a Fed reformist; believes the Fed should be smaller, more focused and professional, with a more strategic economic perspective. Criticizes the Fed's evolution from a "professional central bank" to a "comprehensive government agency," arguing that each expansion of its intervention scope leads to debt accumulation, capital misallocation, and blurred institutional boundaries, forcing ever more aggressive interventions later. He views the Fed as overreaching and inefficient on social issues, stating it should not involve itself in climate, equality, or social matters. He finds the Fed's "data dependence" lacking practical value,沉迷于短期预测, over-reliant on "forward guidance," attempting to influence markets through rhetoric, which is detrimental to policy prudence and achieving its core mission.
2. Potential market impact of Warsh's policy ideas? (A) Trigger for immediate significant adjustment in commodity markets. Due to Warsh's理念 of "criticizing excessive QE + supporting balance sheet reduction + using professionalism to maintain Fed independence," it might curb the non-linear acceleration of the "de-dollarization/fiat currency泛滥" narrative, leading to a sharp rebound in the Dollar Index and a significant adjustment in commodity markets, notably precious metals. But why such a steep decline this time? A more primary reason might be that volatility itself is the main source of volatility. Taking silver as an example, the 1-month at-the-money options implied volatility has surged linearly from already elevated levels since January this year, rising from around 55% to about 90%, exceeding the March 2020 level by this week. Normal levels are 20-30%, and the market cannot sustain such high volatility levels indefinitely.
(B) Short-term and medium-term impact on monetary policy and markets? Compared to the current Fed system, for markets, Warsh implies three very important potential changes: a shift in the Fed's decision-making mechanism, a new inflation theory, and opposition to excessive QE coupled with support for balance sheet reduction. 1. Change in the Fed's decision-making mechanism Warsh criticizes the current "data-dependent + forward guidance" framework and might reduce communication, adopting a more proactive, long-term trend-based strategic perspective for decision-making. Warsh believes data dependence is too backward-looking, and forward guidance attempts to influence markets via rhetoric, harming policy prudence and limiting flexibility. He might shift towards a more前瞻, belief and strategy-based monetary policy framework, setting policy based on judgments of long-term economic trends (e.g., AI-driven productivity boom and deregulation leading to non-inflationary growth), while reducing market communication.
Short-term impact: Markets are "addicted" to the Fed's forward communication. Lacking the缓冲 and "verbal soothing" of forward guidance, before adaptation, economic data fluctuations could反而 amplify market volatility.
Medium-term impact: Without the束缚 of being a "forward guidance prisoner," Fed actions could be more flexible (e.g., the 2021 transitory inflation view might have delayed rate hikes). If markets gradually adapt and are "weaned off" Fed rhetoric and forecasts, policy then would be more predictable (based on actions, not words, avoiding "dovish/hawkish actions vs. hawkish/dovish talk" confusion), potentially reducing market volatility.
2. New inflation theory Warsh believes tariffs are one-time price shocks, not causing persistent inflation. AI-driven productivity gains and deregulation will boost growth potential from the supply side, leading to non-inflationary growth, supporting faster rate cuts without inflation fears. This narrative might also underpin Warsh's proposed more前瞻 strategic framework judgment. The Fed currently has consensus on the former (tariffs) but no public conclusion on the latter.
Short-term impact: Relatively small; probability of substantial rate cuts this year is low. Firstly, Warsh supports "faster cuts" but hasn't endorsed short-term "substantial cuts" (like Trump's preferred 1% or well below neutral). Secondly, initially, facing a divided, data-dependent Fed, and without weaker employment data (falling NFP, rising unemployment), Warsh might struggle to persuade other hawkish FOMC voters and the market (productivity narrative needs time), conflicting with his professional independence persona. Thirdly, post-nomination, market cut expectations rose only slightly, from pricing ~1.92 cuts to ~2.12 cuts this year.
Medium-term impact: If Warsh leads the Fed to consensus under this narrative, based on his "lower rates without inflation" macro trend view, it could open more room for cuts. Impact depends on US productivity boom moving from "narrative" to "reality." If validated, US high growth + low通胀 affords room for balance sheet reduction. Crucially, the US fiscal deficit narrative would reverse (broader tax base + reduced mandatory spending), medium-to-long term bullish for USD assets. If disproven, this narrative is essentially no different from Powell's 2021 transitory inflation theory.
3. Opposition to excessive QE, support for balance sheet reduction Warsh opposes *excessive* QE and its routine use, not QE entirely (supported QE1 as "crisis innovation," opposed QE2). Warsh supports balance sheet reduction but hasn't indicated starting now.
Short-term impact: Likely no room for renewed balance sheet reduction now. After Q4 money market rate volatility increased, breaching the corridor上限, the Fed stopped QT in December and resumed "reserve management purchases" to keep reserves ample, boosting liquidity and calming rates. Restarting QT now would likely cause money market liquidity crises (like 2019) and rising long-end rates.
Medium-term impact: Normally, room for further QT depends on additional cuts under the productivity narrative. In a crisis, QE would likely remain essential, but its scale and duration would probably be weaker than past rounds.
Comments