U.S. President Donald Trump's nomination of former Federal Reserve Governor Kevin Warsh as the next chair of the Federal Reserve (Fed), often called the "president of the world economy," is drawing assessments that U.S. monetary policy has entered a new test. Warsh has shown some agreement with Trump's persistent calls for interest rate cuts, but he has also publicly criticized the Fed for becoming excessively bloated after the financial crisis.
Because of this, analysts say that even if the Warsh Fed lowers the benchmark rate, it is likely not to unleash money on a large scale as in the past. In the end, experts said the Central Bank could feel more burdensome than before for financial markets and borrowers.
1) Lowering the benchmark rate… focus on easing growth burdens
Through recent op-eds and public remarks, Warsh has continued criticism suggesting that current Fed Chair Jerome Powell missed the timing to shift monetary policy. With signs of a slowdown accumulating, keeping the policy rate high for a long time, he judged, has increased the burden on households and corporations. This suggests that, based solely on current economic conditions, Warsh sees it as reasonable to cut the short-term policy rate.
The federal funds rate target range, the Fed's benchmark rate, peaked around 5.25%–5.50% in mid-2024. It then began to be cut in the second half of last year, falling to 3.50%–3.75% as of December. At last month's meeting, the first of this year, it remained at that level. The "high rates" Warsh has taken issue with refer to a phase in which the policy rate remains above the inflation rate for an extended period, keeping the real rate in positive territory. Historically, this has been evaluated as burdensome for household lending and corporate investment.
In fact, during this period the U.S. housing market saw a noticeable contraction in transactions. Corporations, conscious of higher costs for issuing corporate bonds and borrowing, increasingly delayed investment decisions. Warsh has viewed this trend as indicating that the benchmark rate was maintained at an excessively high level relative to economic conditions. This perspective also aligns with President Trump's public pressure on the Fed over roughly the past year to cut rates. This is why the market sees a fair chance that Warsh will move to cut the benchmark rate early in his tenure.
However, this does not mean Warsh will completely overhaul the monetary policy stance. Warsh has made clear that while he views rates as a tool that can be adjusted to economic conditions, rate moves alone do not change the economy's underlying structure.
2) Emphasis on shrinking liquidity rather than adjusting rates
Warsh has consistently emphasized the scale of liquidity circulating in the market over the benchmark rate. After the financial crisis, the Fed bought Government Bonds and mortgage-backed securities (MBS) on a large scale to stimulate the economy. In the process, the Fed's asset size swelled rapidly. Before the financial crisis, Fed assets were under $1 trillion. But through the pandemic, assets expanded to about $9 trillion as of 2022. Even after trimming some assets recently, they still stand at about $6.5 trillion.
Warsh has argued that the Fed's large-scale bond purchases to pump money after the financial crisis stabilized markets in the short term but left new burdens in the long term. In a 2010 speech while serving as a Fed governor, he warned, "The policy of continuing bond purchases to pump money is not a free option." Citing QE2 at the time, Warsh said that if price signals strengthen again—such as a weaker dollar or higher commodity prices—the policy direction should be reassessed even if the unemployment rate is high. This indicates that rather than denying monetary easing to support growth itself, Warsh was early to warn of the side effects that follow when the Central Bank buys bonds excessively to pump money.
Warsh's plan places emphasis on reducing the asset size by putting bonds the Fed holds back on the market even if the benchmark rate is lowered. When the Fed sells bonds, funds from financial institutions or investors who buy those bonds move to the Fed. The funds that flow into the Fed do not circulate in the market for the time being. That produces the effect of reducing the amount of liquidity (funds) moving around the market. The Wall Street Journal (WSJ) analyzed that, under the current Fed liability structure, reserves that banks hold at the Fed amount to about $3 trillion, and that this reserve regime is an important variable in the transmission of monetary policy. Warsh is closer to the view that this structure itself has made the Fed excessively bloated.
3) Even if the policy rate falls, loan interest could rise
The benchmark rate is the policy rate directly set by the Fed. By contrast, market rates such as mortgage loan rates or corporate lending rates move according to the prices of bonds including Government Bonds. If the Fed sells bonds on a large scale, bond supply increases and bond prices come under downward pressure. When bond prices fall, yields—that is, rates—rise. These Government Bond yields serve as a basis for mortgage rates and corporations' funding expense.
As a result, even if the benchmark rate is cut, the loan interest households and corporations actually bear could instead rise. The WSJ warned that when the Fed previously moved to reduce assets, Government Bond yields surged and roiled financial markets, and similar volatility could recur this time. In particular, some analyses said that under the current "ample reserves" regime the Fed operates, the asset reduction process could affect markets more sensitively than in the past.
Because of this view, experts assessed that the Warsh Fed may be more likely to reduce the practice of stepping in to tweak rates or pump money whenever financial markets wobble. Warsh said that if the Central Bank repeatedly shields the market from declines, investors could take risks lightly and asset price bubbles could grow. Aaron Klein, a senior fellow at the Brookings Institution, said, "Warsh has a strong tendency to draw clear lines around the scope of Fed intervention."
Even so, there is considerable interpretation that Trump's choice of Warsh is grounded in political calculation. Among other candidates, Warsh was the only figure who consistently criticized Fed bloat and bureaucratism. This aligns in part with the Trump administration's stance favoring a reduced Fed role. At the same time, his experience as a former Fed governor helps somewhat ease concerns about damage to the Fed's independence.
PBS reported that Warsh's nomination has created a "cautious sense of relief" among markets and experts. This reflects expectations that while Warsh is likely to propose prescriptions different from before, he knows the Fed well and will attempt change within the institution. It means Warsh is perceived as someone who will look to adjust the Fed's structure and role step by step, rather than using short, sharp shock therapy.
The WSJ assessed Warsh as "attempting the rare combination of pushing both rate cuts and Fed asset reduction at the same time." The Brookings Institution also analyzed, "Warsh has a clear line on how far the Central Bank should prop up markets." Experts predicted that if this policy mix succeeds, it could roll back the Fed's role in a more limited and principled direction.
Conversely, if it drives a surge in bond yields or greater financial market volatility, the policy burden the Fed must bear could expand rapidly. Ultimately, the Warsh Fed's success or failure hinges less on how quickly rates are cut than on how far the Fed can reduce its scope of market intervention.