From the Office of the CIO Leadership transition at the Fed: How a Warsh Chairmanship could impact markets

Kevin Warsh nominated to lead the Federal Reserve

On January 30, President Trump announced the nomination of Kevin Warsh to succeed Jerome Powell as chair of the Federal Reserve. Warsh, who served on the Fed's Board of Governors from 2006 to 2011 during the global financial crisis, is widely regarded as a credible and capable leader by the financial community.

Warsh's nomination comes at a critical juncture for U.S. monetary policy. The U.S. economy is expanding at a quicker pace than most expected against a backdrop of persistent inflation sluggish labor market growth and an administration that strongly favors continued monetary easing. Additionally, the rise of AI and its potential to drive productivity growth adds new complexity to the Fed's policy decisions. Importantly, Warsh brings bipartisan support and institutional credibility to the Federal Reserve, which should help reinforce the central bank's independence — a key concern among market participants. Notably, prominent economists aligned with the Democratic Party have praised Warsh's experience, especially his leadership during the financial crisis and his understanding of how Fed policy affects global markets.

Room to cut: How Warsh sees rates in an AI‑driven economy

Some observers associate Warsh with a more hawkish policy based on his tenure with the Fed. In more recent comments, however, Warsh has been notably dovish. He articulated his opinion in a November 2025 Wall Street Journal editorial where he outlined his view about the impact AI was having on the economy. Stating that AI is "profoundly" changing the speed of innovation and allowing the U.S. to expand at a faster pace than most advanced economies, enabling U.S. policymakers to lower rates without sparking inflation.

We believe that as chairman, Warsh would have room to further lower rates to support the economy and households, rather than holding policy too tight out of fear of sparking inflation pressures. This potentially puts Warsh's monetary policy views in line with the Trump administration enabling the Fed to address the affordability issue, especially amongst those in the lower end of the K shaped economy.

Rethinking inflation: Warsh's challenge to traditional Fed models

Warsh has called for a shift in how the Fed thinks about inflation. He has voiced his disagreement with traditional models that focus on consumer spending and wage growth as the main drivers of inflation. He has also stated that the Fed's economic models should be more forward looking, instead of focusing on the historically driven, data-dependent approach long employed by Fed leadership. Further, Warsh articulated his view that inflation is more directly tied to excessive government spending and growth in the money supply. From this perspective, controlling inflation requires a closer look at the interaction between current fiscal policy and monetary supply, rather than solely relying on interest rates to manage the trajectory of the economy.

Another interesting dynamic to be watchful for under a Warsh-led Fed is possible engagement with digital currency and stablecoins. While often framed as a technological or geopolitical issue, stablecoins increasingly intersect with demand for U.S. Treasuries and short term funding markets. The argument is that digital dollars could become critical absorbers of growing Treasury issuance. A clearer regulatory framework under new Fed leadership would reduce uncertainty around the impact of this emerging source of liquidity and its potential impact on Treasury yields and the status of the U.S. dollar as the world's reserve currency.

A leaner Fed? Warsh's long-standing push to shrink the balance sheet

Warsh has been a long time critic of the Federal Reserve's bloated balance sheet, which expanded during the financial crisis and more significantly in the pandemic. Despite years of quantitative tightening, today the balance sheet remains above $6.5 trillion, although it is down from the heights of approximately $9 trillion in January 2022.¹ Warsh has made it clear that he believes that a large balance sheet is no longer well suited to the current environment. He has argued that the Fed and Treasury should work together and be clearer with markets about plans to further reduce the balance sheet. This would go hand in hand with lower interest rates and reducing the cost of outstanding debt service, potentially creating a better environment to better support consumers and small businesses. In addition, Warsh’s longstanding critique of balance sheet expansion raises the likelihood that he would seek a more durable framework for the Fed, perhaps one that even reduces the perception of it functioning as an implicit market backstop.

Market reaction and next steps

The market's initial response to Warsh's nomination was mixed. Reflecting a perceived boost to Fed credibility and independence, the U.S. dollar strengthened while short-term Treasury yields eased as investors pulled forward expectations for additional cuts later this year. Gold and other precious metals fell sharply, signaling reduced demand for hedges alongside confidence in Warsh's selection. Notably, these moves came after a period of U.S. dollar weakness and record highs in gold leading up to the announcement. Equities were modestly weaker on the day of the nomination as investors were undecided if a Warsh‑led Fed could be incrementally less accommodative than markets previously assumed.

Warsh will now go through the Senate confirmation process. Although he is expected to be successfully confirmed, headline risk could be amplified by Senators who will use the forum to express disagreement with the current administration. The Senate hearings are expected to be widely covered by the business media and will no doubt create headlines as we learn more about Warsh's plans as Fed Chair. In the interim, Chairman Powell will remain at the helm and there are two more FOMC (Federal Open Market Committee) meetings on the calendar before the new chair is slated to be installed on May 15.

Looking ahead, the more consequential question for investors to consider is how monetary policy will be executed under Warsh's leadership. By design, the Federal Reserve is a consensus-driven institution, making abrupt policy shifts unlikely. Warsh has been critical of "mission creep" within the central bank and some have suggested that he would be a proponent of pointing the institution back toward a narrower interpretation of its dual mandate of full employment and stable prices. Warsh's credibility also raises the likelihood that he could sway FOMC voters at the margin, subtly shaping the committee's monetary policy trajectory.

While short-term volatility in rates and currencies may arise during the leadership transition, we believe that the broader investment view remains intact. This outlook will continue to rely on the economic crosscurrents of moderating inflation and resilient economic growth while thoughtfully balancing a weakening employment picture.