Friday morning President Trump announced Kevin Warsh as his nominee to replace Jay Powell as Chair of the Federal Reserve. This will be a four-year term set to begin in late May this year. We expect him to be confirmed on time, despite the current Tillis roadblock relating to the subpoenas. We do not anticipate any great change in monetary policy from his appointment alone. The FOMC’s process of rate setting is deeply embedded into the FOMC and will take more than a new Chair to upend. Warsh himself is of impeccable credentials. He is till date the youngest Fed governor. He became Fed governor in 2006 at the age of 35. He resigned in 2011 because of his well justified views on the efficacy of QE-2 unleased by then Fed. However, he never once dissented from an FOMC vote, although he did often publish an opinion in the Wall Street Journal a day or so after FOMC meetings, lamenting the need for the Committee’s actions. His discomfort was due to his genuinely hawkish views and his scepticism about the need for QE, the size and composition of the balance sheet it generated and the collateral some of the lending facilities accepted. When he was a Governor, Warsh said, “the Chair owns the room” in reference to the relative influence of the Chair and other policymakers. We believe the current FOMC might be slightly more cmplex than Bernanke's era. But eventually we expect Warsh to be a deft manager of the FOMC debate, it will take time and careful cultivation for him to get to the status his predecessors enjoyed. As the next Fed Chair, we expect him to not accept the status quo at the Fed and to bring fundamental changes to the Fed’s frameworks and the Alt-Keynesian mindset. The use of excessive force by the Fed will probably be behind us, and the Fed could strike a better balance of prudence and restraint. On the question of Warsh being a hawk or a dove, we believe deep inside Warsh is a genuine monetary policy hawk. His view has been that AI increases productivity and therefore potential growth but then it may not lower the neutral rate. Indeed, the nominal neutral rate could be higher, although the composition would shift to lower inflation and a higher real rate. Since the stance of policy is loosely based on comparing current rates to the neutral rate, the scope for cutting rates on the basis of AI may be quite limited. However, AI may as well offer a reason to cut rates in the short run, because it could weaken labor demand and so cut consumer spending, among other immediate effects. Hence, we expect only two cuts of 25 bps each in June’26 & Sep’26 and then a long pause till March’27. US long end yields might not like Warsh as he does not support QE but Dollar swoons on Warsh as seen in Gold & Silver correction since Thursday when news broke out about Warsh being the next Fed chair.
