Looking At: The Fed Under Warsh

Estimated reading time: 5 minutes

New Sheriff Coming to Town

This week the Senate held its confirmation hearing for Kevin Warsh, President Trump’s nominee for the next chair of the Federal Reserve. Despite the hearing going well (IMO), there are still some roadblocks that could prevent Warsh from being confirmed before Jerome Powell’s term ends on May 16. Delays could intensify the clash between the president and Powell, raising questions about who leads the Fed in the interim and creating anxiety for markets.

For the purposes of this column, however, let’s assume Warsh is confirmed and fast forward to ways in which the Federal Reserve’s approach may or may not change once he is chair.

Not a Sock Puppet

One of the rather humorous moments in the confirmation hearing was when Warsh was asked whether he would be the president’s — or anyone’s — sock puppet. He of course said he would not… (and the headline machine went brrr.)

Sock puppetry aside, the question behind the question was whether or not Warsh would lower benchmark interest rates as a result of political pressure. I am not here to defend anyone’s position, but it is worth pointing out that the Fed chair is only one of 12 Federal Open Market Committee (FOMC) votes that decide whether or not rates change. Although they’re tasked with helping build consensus around that decision, they don’t ultimately make the call alone.

Below is our view of how the voting members of the FOMC lean between dovish (favoring lower rates), neutral, or hawkish (favoring higher rates.) Since there are a fair number of members sitting in the neutral category, and still a few hawks, a decidedly dovish stance will be difficult to manufacture. I think Warsh has his work cut out for him, even if he does want to lower rates.

Note that I’m making some assumptions here: Namely, that Warsh gets confirmed, Powell steps down, and Stephen Miran is reappointed as a governor. None of that is certain and could change. In fact, there is a growing belief that Powell will remain on the board as a governor even after Warsh is confirmed. We should have more clarity on that in the coming weeks.

Dovish on Rates, Hawkish on Balance Sheet

The widely held expectation is that Warsh will be dovish on rates, and hawkish on the balance sheet. In other words, he may lean toward cutting rates, but also toward shrinking the balance sheet… which in some ways, has an offsetting effect on lower rates. He’s been quite vocal about the balance sheet issue and I would expect that to remain a central focus as he begins his chairmanship. The Fed’s balance sheet currently sits at $6.7 trillion. Warsh has not indicated a target size, other than saying he’d like it to be smaller.

The interesting knock-on effect of reducing the Fed’s balance sheet is that if the public sector (the Fed) isn’t holding the assets, the private sector (banks) will need to absorb them. In order for that to happen, bank regulations would likely need to be relaxed. That’s another piece to the puzzle Warsh will probably focus on.

What’s Really Going to Happen?

In reality, the FOMC won’t make rate decisions without substantial amounts of data support, and members will debate the decision based on the facts at hand and the models they rely on.

Market expectations for rates have swung dramatically over the past couple months, driven mostly by inflation numbers and the uncertainty surrounding the war in Iran. Before the war, markets had expected two or three cuts this year, but at one point actually swung to the other extreme, pricing in the possibility of hiking rates. Right now, markets are pricing in less than a 50% chance of one cut in 2026. I don’t expect that to materially change simply because Warsh is head of the Fed, especially since there is still the possibility of an inflationary oil shock.

Warsh is more likely to drive change through bank deregulation, balance sheet size, and perhaps a shift in the Fed’s approach to communication. Some of those changes will probably be welcomed by markets, but may take time to materialize.

All in all, in my view, Warsh as chair poses fewer risks to markets than a prolonged confirmation process that exacerbates tension between Powell and President Trump.

Disclaimer
SoFi Securities (Hong Kong) Limited and its affiliates (SoFi HK) may post or share information and materials from time to time. They should not be regarded as an offer, solicitation, invitation, advice, recommendation to buy, sell or otherwise deal with any investment instrument or product in any jurisdictions. Keep in mind that investing involves risk, and past performance of an asset never guarantees future results or returns. It’s important for investors to consider their specific financial needs, goals, and risk profile before making an investment decision.
SoFi HK does not make any warranties about the completeness, reliability and accuracy of this information and will not be liable for any losses and/or damages in connection with the use of this information.
The information and materials may contain hyperlinks to other websites, we are not responsible for the content of any linked sites. The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi HK. These links are provided for informational purposes and should not be viewed as an endorsement. The risk involved in using such hyperlinks shall be borne by the visitor and subject to any Terms of Use applicable to such access and use.
Any product, logos, brands, and other trademarks or images featured are the property of their respective trademark holders. These trademark holders are not affiliated with SoFi HK or its Affiliates. These trademark holders do not sponsor or endorse SoFi HK or any of its articles.
Without prior written approval of SoFi HK, the information/materials shall not be amended, duplicated, photocopied, transmitted, circulated, distributed or published in any manner, or be used for commercial or public purposes.