Weighing in on Warsh

• Warsh's leadership would likely emphasize shrinking the Fed's balance sheet and potentially reducing forward guidance, which could increase bond market volatility and impact funding markets
• The FOMC's 12-member voting structure includes both Biden and Trump appointees plus regional bank presidents, ensuring policy remains driven by committee consensus rather than a single leader
• Senate confirmation may face delays due to a 'Powell subpoena' situation mentioned by the Senate Banking Committee, though the author expects Warsh will ultimately clear the process

Summary: Weighing in on Warsh

Key Developments

Kevin Warsh has been nominated as the next Federal Reserve Chairman, with his term beginning after current Chair Jerome Powell's chairmanship expires in May. Warsh previously served as Fed Governor from 2006-2011, spanning the Financial Crisis and Great Recession, providing crisis-tested experience.

Market Implications

Bond markets initially responded positively to the nomination, viewing Warsh as a "known quantity" with established inflation hawk credentials. His appointment reduces uncertainty during a critical monetary policy period. However, confirmation requires Senate approval, currently delayed pending resolution of the "Powell subpoena" situation, though confirmation is expected to proceed.

Policy Focus Areas

Balance Sheet Reduction: Warsh is expected to prioritize shrinking the Fed's balance sheet, advocating for a smaller central bank "footprint" in Treasury and MBS holdings. This could significantly impact funding markets based on past reduction episodes.

Communication Changes: A Warsh-led Fed may reduce forward guidance and scale back communication practices like detailed FOMC statements, dot-plots, and economic projections—potentially increasing bond market volatility.

Rate Policy: While Warsh has discussed lower rates recently, this comes within the framework of balance sheet reduction.

Committee Composition

Monetary policy decisions remain with the 12-member Federal Open Market Committee, including both Biden and Trump appointees plus rotating regional bank presidents. This structure maintains institutional checks regardless of individual appointments.

Outlook

Analyst Kevin Flanagan emphasizes that despite political dynamics, Fed policy will remain data-dependent. The author's decades of Fed-watching suggest "past is never prologue," expecting Warsh to follow economic data like previous chairs.