The Federal Reserve – New Leadership, Same Landscape

On January 30, U.S. President Donald Trump announced Kevin Warsh as his pick for Federal Reserve (Fed) Chair. Warsh has a track record of hawkishness from his previous stint as Fed governor. He has also has annunciated a broad philosophy that the Fed has moved too far from its original mandate by promoting ESG objectives and in enabling excessive federal spending through quantitative easing. That being said, he has argued more recently that the Fed should cut interest rates more aggressively.

His confirmation by the Senate is probable, although it could be delayed, since the head of the Senate Banking Committee has said that he will oppose Warsh’s confirmation until the Department of Justice’s inquiry into Fed Chairman Jerome Powell is resolved.

However, for investors, the more important issue is the economic, fiscal, financial and monetary landscape he will confront, assuming he takes office this spring. This configuration provides little support for substantial further Fed easing. Moreover, because of the structure of the Fed, Warsh would need to convince the majority of his colleagues of the wisdom of multiple near-term rate cuts, something which seems improbable in the current environment.

A History of Hawkishness

Warsh was first appointed as Fed governor by ex-U.S. President George Bush back in 2006 and he served five years in that role. During his tenure, he never dissented on an actual Federal Open Market Committee (FOMC) vote. However, his speeches and interviews at the time marked him as something of a hawk, expressing persistent concerns about inflation despite the deep recession caused by the global financial crisis.

He has also consistently warned about the dangers of the Fed over-reaching in trying to achieve goals beyond its remit. In a 2010 speech¹, he railed against protectionism and short-term fixes, while noting that “The Federal Reserve is not a repair shop for broken fiscal, trade or regulatory policies”. More recently, in a speech to the G30 group last April², he argued that the Fed had “assumed a more expansive role inside our government on all matters of economic policy” while moving “into matters of statecraft and soulcraft, too”. He claimed that these “forays far afield” had led to systematic errors in the conduct of monetary policy.

Given this backdrop, Warsh seems like an unlikely candidate for the President to pick to achieve his oft-repeated goal of lower interest rates. However, in a TV interview last July, Warsh endorsed lower both short-term interest rates and a smaller Fed balance sheet, asserting that cutting both could reduce interest rates across the yield curve.

The Landscape and Monetary Policy

While lowering the federal funds rate could exert some downward pressure on long-term rates, it is hard to see how reducing the balance sheet would. However, regardless of this issue, the argument for any further monetary easing at this stage is challenging.

First, economic indicators simply don’t support further easing.

Real GDP grew at an above-trend 3.8% annualized pace in the second quarter and 4.4% in the third. Data on fourth-quarter GDP won’t be released until February 20^th, but recent indications suggest that consumer spending, which accounts for 68% of GDP, grew by roughly 3.0%. Even if overall fourth-quarter real GDP growth was a little slower than that, it should reaccelerate in the first half of 2026 as bumper income tax refunds and, potentially, so-called “tariff rebate” checks show up in consumer accounts. Consumer spending is also being boosted by the wealth effects of a now more than three-year equity bull market. Meanwhile, areas of capital spending continue to grow because of the artificial intelligence investment spending boom.

The job market also doesn’t argue for further easing. On Friday, Fed Governor Christopher Waller released a statement explaining his rationale for dissenting from last week’s FOMC decision not to lower rates. His principle argument was that the labor market remains weak. So it is—in terms of net job creation, with the economy adding just 15,000 jobs per month on average since last June, an estimate that will likely be revised even lower in benchmark revisions due out next Friday.

However, weak job creation doesn’t imply a loose labor market if labor supply is also falling. Weekly unemployment claims have trended down recently while the unemployment rate, at 4.4% in December, was unchanged from three months earlier. Most importantly, new population projections, released by the Census Bureau last week, assume net migration of just 321,000 between July 2025 and June 2026 which, we estimate, would imply a 20,000 per month decline in the population aged 18 to 64. It is hard to increase employment if the number of potential workers is falling every month and this is not, as Kevin Warsh himself would probably argue, a problem that monetary policy can solve.

And then there is inflation. At his press conference on Wednesday, Jerome Powell noted that the Fed estimates core Personal Consumption Expenditures deflator inflation for December at 3.0% year-over-year. If this is correct, it will be the highest reading since last February and it could well move up further to 3.5% by June as the extra demand from income tax refunds allows retailers to pass through more of the cost of tariffs to consumers.

Inflation should fade in the second half of 2026. However, with unemployment stable and close to the Fed’s 4.2% goal while inflation is rising and well above the Fed’s 2.0% target, logic suggests that, if anything, the Fed should be tightening rather than easing.

The new Fed Chairman will also have to consider the possibility of further fiscal stimulus from tariff rebate checks which could boost both growth and inflation. And then there are financial markets where bubbly valuations for stocks, precious metals and cryptocurrencies, combined with very tight credit spreads, suggest that liquidity is, if anything, too abundant.

Finally, monetary policy simply isn’t tight by historical standards. As we noted last week, in the 50 years before the great financial crisis, the federal funds rate averaged 1.84% above core Consumer Price Index inflation. We estimate that this spread was 0.98% in January, making current policy loose, rather than tight, relative to history. This is even before considering the stimulus implicit in the almost USD 6.3trillion held by the Fed in Treasuries and mortgage-backed securities as a legacy of past bouts of quantitative easing. 

More Chairman than Chief

The case for aggressive easing is a tough one to make, based on economics, fiscal policy, financial market conditions and current monetary policy. However, equally important in determining the pace of future easing, is simply the institutional structure of the Fed. If the Supreme Court rules that the President doesn’t have the authority to dismiss Lisa Cook, and if Jerome Powell decides to remain on the board even after relinquishing the post of Fed Chair, then the two votes in favor of further Fed easing at last Wednesday’s meeting could still be just two votes in March. To cut rates further, the new Fed chair would need to have seven.

He could, of course, try to persuade his colleagues. His predecessors in recent decades—Powell, Yellen, Bernanke, Greenspan and Volker—all wielded greater power than they technically possessed because of their ability to persuade and the respect they commanded among their colleagues. Chairman Warsh, if he is confirmed, may well achieve that stature over time.

In the meantime, however, he will be “chairman” more than “chief” and will have to convince his colleagues that he is urging a course that is in the long-term interests of the economy and not motivated by short-term political considerations. If he does so, and inflation and growth both fall to below 2.0% by the end of 2026, he may well open the door to more meaningful Fed easing in 2027. But to achieve this, he will have to both boldly assert his commitment to Fed Independence and act to preserve it, necessities that should be of some comfort to investors both in the United States and around the world.

¹Rejecting the Requiem, Remarks by Kevin Warsh to the Securities Industry and Financial Markets Association, New York, November 8^th, 2010
²Commanding Heights: Central Banks at a Crossroads, Kevin Warsh, IMF Lecture Hosted by G30, April 25, 2025.

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