KB Securities said on the 22nd that, based on Kevin Warsh's confirmation hearing remarks, concerns about the U.S. Federal Reserve (Fed) tightening could ease.
Kim Il-hyeok, a KB Securities researcher, said, "Nominee Warsh repeated his existing view that artificial intelligence (AI) can lower production expense and expand supply, easing inflationary pressures," and noted, "He is unlikely to be aggressive on currency tightening."
Nominee Warsh also suggested the possibility of reviewing approaches that reflect a wider range of price data, or trimmed mean and median indicators, instead of the personal consumption expenditures (PCE) price index that the Fed currently uses for inflation. The explanation was that this is interpreted as an intent to find indicators that can more clearly capture the price-declining effects of AI.
Kim also said, "Nominee Warsh emphasized that President Trump has never demanded a definitive answer on the policy rate decision, and even if he had, Warsh would never have agreed," explaining that Warsh drew a line against the possibility of decisions on the policy rate being swayed by political pressure.
Kim assessed, "Taken together, nominee Warsh's remarks suggest a stance of approaching currency tightening as cautiously as possible, premised on the supply-expanding effects of AI." Kim added, "However, if AI's price-stabilizing effects do not materialize, it cannot be ruled out that inflation will be curbed through currency tightening policies as before."
On liquidity supply, the will to reduce the balance sheet was also mentioned. Kim said, "Nominee Warsh pointed out that 'as the Fed's balance sheet grew, recurring problems arose, and this was one of the reasons the Fed became involved in politics,' arguing that it is undesirable for the Fed to hold large amounts of long-term Government Bonds like the fiscal authorities."
Previously, in 2023, nominee Warsh said that because of the Fed's quantitative easing (QE), funds were supplied in large amounts at low cost and real interest rates turned negative, which led to the Silicon Valley Bank (SVB) problem.
However, he indicated that the balance sheet would be reduced gradually. Nominee Warsh said, "It took 18 years for this problem to occur, so we can't solve it in 18 minutes," adding, "As we shift to a policy regime with more focus on interest rates, changes should proceed carefully—with good coordination, planning, and explanation."
As for specific methods, the explanation was that quantitative tightening (QT) that reduces reinvestment in maturing bonds rather than selling held Government Bonds, or curbing further asset expansion to lower the ratio of Fed assets to the size of the economy, was mentioned.
Kim also added, "Nominee Warsh cited 'international finance' as an area where the Fed's independence is relatively less required," saying, "This is interpreted as suggesting a willingness to cooperate if the administration seeks to use currency swaps with major countries' Central Banks as a policy tool."