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Kevin Warsh set to face early reality check as Trump’s man at the Fed
Kevin Warsh has been nominated by President Donald Trump as the next chair of the US Federal Reserve and faces an early test as he seeks to deliver on promises of major policy change. Warsh has pledged to shrink the Fed's balance sheet and argued that artificial intelligence–driven productivity gains will keep inflation low, creating room for lower interest rates. After three rate cuts late last year, the Fed paused in January amid persistent inflation and a steady labour market, with markets not expecting another cut before June.
Kevin Warsh waited almost a decade before finally clinching President Donald Trump's nomination to be chair of the Federal Reserve. He won't need to wait as long before his first big test in the job.
Having won the race with a promise of “regime change” at the Fed, suggesting he would make significant changes, Warsh has pledged to shrink the Fed's balance sheet and argued that a productivity boom driven by artificial intelligence will keep inflation low.
While that prognosis was enough to convince Trump, his Fed pick will now need to convince fellow policymakers and investors. After cutting rates three times late last year the Fed hit pause in January amid persistent inflation, signs of a stabilizing labor market and expectations for stronger growth in 2026. Traders aren't pricing another rate cut until June, at the earliest.
The tension in Trump's demand for cheaper borrowing costs may ultimately be resolved by a weakening labor market or lower inflation. Such a backdrop would greenlight Warsh to push for more rate cuts, and possibly win support from other policymakers.
But if those conditions don't play out, then delivering on his promises will prove much more difficult, according to TS Lombard economist Dario Perkins.
“The last thing an economist needs is to be given an opportunity to put their theories to test,” Perkins said. “It will be his reputation on the line, a sort of winner's curse.”
Withering Criticism
While Warsh is not viewed as being as close to Trump as Kevin Hassett, the White House insider he beat out for the Fed job, his views have fueled worries that he, too, might buckle to White House demands for much lower rates despite persistent price pressures.His previous withering public criticism of the Fed and praise for Trump came as the White House hammered policymakers for not cutting rates fast enough. An unprecedented Department of Justice investigation related to the overspend on renovations to the Fed's headquarters has only stoked concerns that Trump is seeking to remold the US central bank.
Analysts warn that pushing rates much lower during a time of persistent inflation and surging debt could rattle investor confidence, sending bond yields — and real borrowing rates — higher.
“He knows he will need to use his considerable skills to marshal evidence and analysis to support the direction he wants to take policy,” said Donald Kohn, who served as vice chair of the Federal Reserve during the 2008 financial crisis when he worked alongside Warsh, who was a governor at that time.
Ultimately, a Fed chair will be driven to do what is right for the economy, and any rhetoric used to secure the job should be viewed through that political lens, according to Michael Faulkender, former deputy to Treasury Secretary Scott Bessent.
“Irrespective of what someone says when they are a candidate for the position, a Fed chairman knows that his responsibility is to keep inflation low,” he said.
Still, since Trump returned to office in January 2025, Warsh has called for lower rates and, according to the president, told Trump in December he favored more cuts.
Productivity Bull
In a Wall Street Journal opinion piece in November, Warsh detailed some of the approach he would take as Fed chair: “Fundamental reform of monetary and regulatory policy would unlock the benefits of AI to all Americans. The economy would be stronger. Living standards would be higher. Inflation would fall further.”Warsh expanded on that theme in a Dec. 4 podcast hosted by Aven Financial Inc., when he said, “This is the most productivity-enhancing wave of our lifetimes — past, present and future.”
Those comments suggest a willingness by Warsh to assume that AI-driven productivity gains will insulate the economy from inflationary pressures and allow the Fed to cut rates even in the face of robust economic growth.
Warsh's Wall Street Journal article “veers too far into the world of praising the new world order that Donald Trump has created, meaning that the rules of monetary gravity no longer apply to the Fed when Trump is in the Oval Office,” Peter Conti-Brown, a professor and Fed historian at the University of Pennsylvania, wrote in a Substack column.
Aside from his bet on productivity, Warsh's plan to reduce the Fed's balance sheet as a vehicle to allow interest rates to come down has been greeted with skepticism.
“It offers an easy way to sound hawkish and serious about inflation while providing cover to later advocate for the rate cuts this White House wants,” Stefan Koopman, a senior macro strategist at Rabobank, wrote in a note.
In a Bloomberg survey conducted in early December, a majority of economists favored Fed governor Christopher Waller as the best choice on the administration's shortlist. Warsh was favored by 13% of respondents.
Long-Time Hawk
Appointed to the Fed's Board of Governors in 2006 by President George W. Bush, Warsh was noted for advocating higher rates even in the depths of the financial crisis, warning often of impending inflation. He has long been critical of the Fed's bond-buying programs and resigned from the Fed in 2011 soon after then-Chair Ben Bernanke embarked on a second round of purchases aimed at stimulating the overall economy.During the financial crisis, Warsh helped broker the sale of Wachovia Corp. to Wells Fargo & Co., and was the architect of a plan to supply the country's nine biggest banks with billions of dollars of capital in the fall of 2008.
Warsh will need to be confirmed by the US Senate. That process has been complicated by the DOJ probe into the Fed as a key Republican lawmaker has vowed not to approve any Fed nominees until that matter is resolved.
Regardless of who has the top job at the Fed, their ability to dictate policy will be limited. Rate decisions can only be taken by a majority of the Federal Open Market Committee, where the chair has just one vote. Even Powell, who enjoys wide respect on the panel, in December faced a stiff challenge in seeking broad support for a third straight rate cut.
If he struggles to lower rates, Warsh might reshape the central bank through other avenues. And in the wake of Fed missteps — its delayed response to the pandemic inflation surge and supervisory shortcomings exposed by the failure of Silicon Valley Bank — there's no shortage of those calling for reform. They include Treasury Secretary Scott Bessent, who has repeatedly accused the Fed of having strayed from its primary mandate of setting monetary policy.
“We get crisis — whether it's financial crisis, economic crisis, global pandemic crisis — then we get the blame, and policymakers and politicians, they look and they blame the Fed,” said Sarah Binder, a professor of political science at George Washington University. “It suggests to me that even if it doesn't succeed, attempts at reform are coming.”
Reform Calls
Whether reform is aimed at truly improving the institution, or serves as an excuse for gaining greater control over rates, is a separate question. Trump has said he wants a majority on the Fed's Board of Governors that shares his view of the economy.That raises questions about what other changes the White House may seek. Bessent has suggested the Fed curtail the deployment of its balance sheet and most recently proposed changing who is eligible to lead the 12 regional reserve banks. Given the Trump administration's history, other changes could include severe staff cuts.
Should Bessent pursue a true shakeup, the Fed chair will play a pivotal role in that process, said Mark Spindel, who along with Binder co-authored the book The Myth of Independence: How Congress Governs the Federal Reserve.
“The chair has a lot of control over the board staffing and what research questions get asked and answered,” Spindel said. Additionally, “a majority of the board has a lot of control over the system. They could essentially engineer replacements to certain district bank presidents, should they wish.”
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