An increasing number of seasoned Wall Street macroeconomists believe Kevin Warsh, the nominee for Federal Reserve Chairman, faces a nearly impossible dual mandate: curb inflation while satisfying the President who nominated him, Donald Trump. Kevin Warsh, Donald Trump's nominee for the next Fed Chair, believes a key marker of successful monetary policy is when people cease discussing inflation. However, achieving this would likely prevent the nominee from pleasing the appointing President in the short term. Just over an hour before Warsh began his confirmation hearing before Congress on Tuesday, President Trump reiterated his stance on interest rates, telling reporters he would be "very disappointed" if the new Fed Chair did not lower benchmark borrowing costs immediately upon taking office.
During a two-hour questioning session by the Senate Banking Committee, Warsh was direct in defending the Fed's independence, insisting President Trump had not asked him to promise anything regarding interest rate decisions—and that even if such a request were made, he would unequivocally refuse. What Kevin Warsh truly aims for may not be a traditional pivot to a "dovish or hawkish stance," but rather a fundamental reconstruction of the Fed's operational framework. This involves shrinking the balance sheet to reduce the normalization of quantitative easing and its quasi-fiscal functions, while repositioning interest rate tools to better support the U.S. real economy and the significant productivity improvements driven by the AI revolution, when conditions allow.
Although Warsh lists radical "Fed regime change" rhetoric, data scrutiny, and a reassessment of the Fed's massive balance sheet as part of his proposed reforms for the U.S. central banking system, achieving his profound definition of price stability by year-end presents an exceptionally challenging task. Echoing former Fed Chairman Alan Greenspan's view on inflation targets, Warsh defines price stability—one of the Fed's two congressional mandates—as a rate of price change that "no one is talking about." In other words, it is the point where price changes no longer influence the decisions of American households or businesses—the level Greenspan envisioned when establishing 2% as the long-term inflation target.
Regarding the Fed's other mandate—maximum employment—Warsh stated the U.S. economy is very close to a situation where "people are fully employed." However, quelling concerns about rising prices among businesses and households will likely take many months, if not years. Currently, oil price shocks have pushed overall U.S. inflation close to a two-year high, exceeding the Fed's 2% target by more than a full percentage point. As illustrated, U.S. inflation remains stubbornly above the 2% target and is still rising. Even before the Iran conflict, the Fed's tracked core inflation measure was already about one percentage point above target. For many months to come, few Americans are likely to stop talking about inflation—or stop acting because of it.
A recent University of Michigan consumer survey showed one-year inflation expectations surged a full percentage point this month to 4.8%, the highest level in seven months. A latest ISM survey indicated that overall input prices for U.S. businesses last month reached their highest point since the 2022 inflation surge. According to Ipsos rolling poll data, Trump's approval rating for handling cost-of-living issues this month is just 26%, among his lowest polling figures. A recent poll chart shows Donald Trump's approval rating on handling the economy over time, according to Reuters/Ipsos. By any measure, the U.S. has not achieved price stability. If the goal is "nobody talking about it," the Fed remains far from that point.
Of course, Warsh's statement itself might have been somewhat off-the-cuff, but his broader testimony provided a more original and analytical exposition of his views on the U.S. economy and his plans for reforming the Fed's monetary policy framework—perhaps offering more flexibility than the blunt wording of his definition suggests. If confirmed, the new Chair, set to lead the Fed for at least the next four years, will take over from Jerome Powell next month. He also discussed reviewing issues in inflation data collection, the potential AI productivity wave, forward-looking monetary policy-making, and gradually reducing the Fed's large balance sheet, which could create more room for the interest rate cuts long desired by Trump.
Even if all this ultimately builds a core rationale for further monetary easing, the clamor about prices from workers and businesses makes beginning his term with rate cuts seem counterintuitive and contrary to his stated policy stance. The market understands this well—at least since the recent severe oil price shock. Latest pricing in interest rate futures markets implies less than a 50% probability of a Fed rate cut this year, with further cuts not being priced in for at least the next 12 months.
Data released Tuesday showed U.S. retail sales unexpectedly recorded their largest monthly increase in a year for March, driven significantly by soaring gas station revenues amid high oil prices catalyzed by Middle East geopolitical conflicts, alongside consumer spending in other categories being notably stronger than economists' consensus forecasts. This highlights resilient and strengthening consumer spending, which accounts for nearly 70% of U.S. GDP, as consumers maintained robust purchasing across various goods despite soaring gasoline prices due to the Iran war. Consequently, after the latest retail sales data, rate futures traders further scaled back bets on the Fed initiating a rate-cutting cycle this year. The "CME FedWatch Tool" shows a majority of traders now betting the Fed will hold rates steady this year—a shift from before the retail data, when the market leaned towards expecting one cut.
Previously released inflation data showed March U.S. CPI rose 3.3% year-over-year, core CPI was up 2.6% year-over-year, and headline CPI increased 0.9% month-over-month. Regarding PPI data, final demand increased 0.5% month-over-month and 4.0% year-over-year in March, with final demand energy prices surging 8.5% monthly. Combined with the stronger-than-expected retail sales data, this suggests the Fed is confronting a classic pessimistic combination reminiscent of stagflation: short-term growth remains resilient, but inflation is reaccelerating. In this environment, the Fed's most natural response is not to cut rates quickly but to wait for more evidence confirming whether the oil price shock will spread from energy to broader core prices and inflation expectations. This is the core logic behind Deutsche Bank's firm expectation of no Fed rate cuts throughout 2026.
For investors betting that Trump's new Fed Chair nominee would deliver on the White House's rate-cut wishes, the outlook has grown gloomier. Warsh's extensive focus on balance sheet reduction during the hearing marginally tightened this optimistic picture further. Based on all this, Trump is highly likely to be very disappointed—especially in a midterm election year.
Regarding direct political pressure, even if not explicitly stated, Warsh's latest view is: "Inflation is a choice, and the Fed must take responsibility for it." He added that the administration has the right to express its views. "The Fed's independence depends largely on the Fed itself." However, not everyone agrees, particularly in the context of legal cases involving the current Fed Chair. Chair Powell himself has stated that such a case is merely an "excuse" for President Trump to pressure him for further rate cuts. Former Fed economist Claudia Sahm was more blunt on Tuesday, writing: "Warsh's platitudes ignore current reality. Trump's pressure on the Fed is far more than just talk." She wrote, "Central bank officials opposing Trump's views on rates don't just need to be 'strong enough to listen and disobey'—they also need to be personally wealthy enough to cover legal fees if sued in retaliation."
If Warsh cannot persuade his FOMC colleagues to accept his grand new vision for the central bank, or make Americans stop talking about inflation, the market's monetary policy honeymoon period with him may be short-lived.
Beyond just rate cuts and balance sheet reduction, Kevin Warsh is betting on AI productivity dividends, aiming to perform structural surgery on the Fed. The so-called "old Fed policy framework," simply put, is the operational paradigm established after the 2008 financial crisis and further entrenched during the pandemic—treating an oversized balance sheet as normal, gradually transforming QE and long-term bond holdings from crisis tools into semi-regular tools, managing market expectations via ample reserves, forward guidance, and the dot plot, while implicitly accepting the Fed's deep, long-term involvement in Treasury and mortgage markets.
Warsh explicitly criticized this "normalization of balance sheet expansion" during his hearing, arguing it disproportionately supports Wall Street asset prices, distorts market pricing, and increasingly entangles the Fed in quasi-fiscal functions and political controversies. The Fed's current asset holdings are approximately $6.7 trillion, down from the peak of around $9 trillion in 2022 but still far above pre-financial crisis levels. Warsh's proposed new framework essentially restores interest rates to the primary tool role and relegates the balance sheet to a secondary or unconventional tool position. That means—using QE only at the zero lower bound or during major crises, normally pursuing gradual balance sheet reduction, decreasing long-term asset holdings, and weakening the Fed's quasi-fiscal role; simultaneously rebuilding the inflation analysis framework, reducing reliance on the dot plot and excessive forward guidance, and placing greater emphasis on price stability credibility, data quality, and structural factors like productivity and AI.
What Kevin Warsh truly intends may not be traditional "dovish or hawkish monetary policy," but a reconstruction of the Fed's operational framework: shrinking the balance sheet and weakening the normalization of QE and quasi-fiscal functions, while repositioning interest rate tools to support the real economy and productivity improvements when possible. In other words, he does not seek a simple repeat of the "massive stimulus" seen during the COVID-19 pandemic, but rather aims to pull the Fed back from the highly balance sheet-dependent policy regime of the past decade towards a framework that prioritizes credibility, price stability, and re-emphasizes the "monetary standard." This explains why he repeatedly stressed reforming communication mechanisms, overhauling the inflation framework, reducing forward guidance, and tended to describe large-scale asset holdings as arrangements benefiting "Wall Street" more than "Main Street."
Warsh sees not merely a cyclical fluctuation, but the end of the old low-inflation world following de-globalization, supply chain fragility, and the normalization of energy shocks. In this context, his criticism of the 2021-2022 inflation失控, his firm stance that the "inflation framework needs rewriting," and his high regard for AI productivity dividends are all part of the same thread: he is betting that the future method for suppressing inflation lies not in further expanding the balance sheet to prop up assets and boost markets, but in relying on technological progress, productivity improvements, and a more restrained central bank balance sheet to rebuild monetary credibility.
However, the problem is that while his latest logic is directionally consistent, its implementation remains highly uncertain. Specifically, whether AI can generate disinflationary productivity dividends quickly enough is currently more of a strategic hypothesis than a verified growth reality. This also explains why Wall Street macroeconomists and strategists are sharply divided on Warsh's recent comments: medium-term views lean towards "very creative and unique ideas," while short-term trading views lean towards "difficult to deliver."
On one hand, a "technical path" towards a narrower balance sheet is beginning to emerge, including easing certain liquidity regulations, reducing the banking system's demand for reserves, and adjusting interest rate control tools to create room for lower short-term rates. From this perspective, Warsh's advocated combination of "balance sheet reduction + rate cuts" is not theoretically self-contradictory. On the other hand, real-world constraints are stark: the oil price shock has pushed overall U.S. inflation near a two-year high; core inflation was already about 1 percentage point above target before the Iran war; the University of Michigan survey shows one-year inflation expectations jumped to 4.8% this month; and market futures pricing implies less than a 50% chance of any rate cut this year.
This means that even if Warsh takes office, he will find it extremely difficult in the short term to simultaneously satisfy Trump's political demand for "immediate rate cuts" and meet his own price stability standard of "nobody talking about inflation." Warsh's own new policy framework highlights that he may not be the "rate-cutting Chair" Trump has long awaited, but rather an "institutional restructuring advocate" attempting to trade a tighter liquidity framework for greater future policy flexibility. His core monetary policy ambition is not to make the Fed's balance sheet more accommodative, but to transform the Fed from a "balance sheet-dominated central bank" into a "credibility and rules-dominated central bank"; rate cuts would merely be a potential outcome within this new framework, not the starting point.
For financial markets, this implies that if Warsh ultimately drives reform, the long-held assumption of abundant dollar liquidity would be the first to be repriced, followed by the short-term rate path itself. Precisely for this reason, Wall Street's most genuine current pricing attitude is not belief in imminent significant easing, but the judgment that he may genuinely want to "execute a major transformation of the Fed." However, translating this grand vision into executable policy within the FOMC, acceptable to markets, and politically survivable, presents an extremely high degree of difficulty.
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