The next Fed Chair

After months of speculation, Trump has nominated Kevin Warsh as Jerome Powell’s successor as the next Chair of the US Federal Reserve (Fed). While his Senate confirmation will be largely procedural, the timing of his appointment – which is supposed to be in May – could be complicated by the pending criminal investigation into Powell.

As we’ve noted before, Warsh is a senior academic, experienced financier and regarded as a relatively safe pair of hands. He has actually served as a voting member on the Fed’s Board of Governors before – he was in fact the youngest to do so, at the age of 35 – and arguably during one of the most difficult periods in modern financial history (2006-2011).

The initial market reaction reinforced this view to an extent, with little movement across US stocks and bonds – or money market expectations (two rate cuts are still pencilled-in for 2026). Warsh’s ‘credible’ status was perhaps reflected more visibly by a firming up in the US dollar, and more strikingly, by a big reversal in precious metal prices (although, technical factors most likely exacerbated these moves).

Some commentators have conversely suggested that Warsh may still have a political tilt. He served in the George W. Bush Administration and has indirect family ties and close relations to Trump and Treasury Secretary Bessent, respectively. Nonetheless, he is generally perceived to be a credible candidate to lead the Fed by market participants, who would likely defend the wider monetary status quo, particularly when compared to some of the other previous frontrunners for the role – namely, another ‘Kevin’ (Hassett).

That said, Warsh will likely try to stamp some of his own views on the Fed.

First, he appears to be in the camp of lower interest rates – perhaps why Trump nominated him – and seems to believe that AI-related productivity gains may be a significant disinflationary force (a point we are more sceptical about in the near term). But a more diverse mix of views on the Fed Board is not necessarily a bad thing, and the Chair will still hold just one of twelve votes. Second, he has long suggested that the Fed needs to shrink its balance sheet: his disagreement with another round of QE in 2011 was reportedly why he resigned from the Fed Board back then. However, ambitions of a smaller Fed balance sheet – which would technically be a tightening in financial conditions – may come up against market liquidity constraints.

Looking ahead, browbeating from Trump is unlikely to disappear, and he has already ‘joked’ that he may sue Warsh if he doesn’t cut rates. However, the important takeaway here continues to be that the Fed is likely to remain unwavering and independent – even in the face of considerable political pressure.

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