5 Things Kevin Warsh Could Change At The Fed — And Why Markets Are Nervous
President Donald Trump‘s nomination of Kevin Warsh to succeed Jerome Powell as Chair of the Federal Reserve is already rippling through markets.
On Friday, U.S. stocks—tracked by the SPDR S&P 500 ETF (NYSE:SPY)—closed lower, the dollar strengthened, precious metals suffered a historic selloff, and crypto assets extended losses into the weekend—an early signal that investors are bracing for a potentially dramatic shift in how the Fed approaches growth, inflation, and its role in the economy.
1. Inflation Is ‘A Choice,’ Not a Trade-Off
Warsh rejects one of the Fed’s most entrenched ideas: that low unemployment mechanically leads to inflation.
On Monday, veteran strategist Ed Yardeni wrote that Warsh views inflation as “a byproduct of unsound policy decisions,” not the inevitable result of economic strength.
Warsh explicitly rejects the Phillips Curve framework, which still underpins much of the Fed’s modeling.
“Warsh frequently slams the Fed for being ‘stuck with models from 1978,’ referring to the traditionally relied upon Phillips Curve model,” Yardeni said.
For markets, this raises a key concern: if the Fed stops tightening policy in response to strong labor data, will inflation expectations remain anchored?
2. Lower Rates—But Only With a Smaller Fed Balance Sheet
From a market perspective, this is where Warsh’s thinking becomes most complicated.
David Mericle, economist at Goldman Sachs highlights that Warsh has consistently argued that interest rate cuts should be paired with balance sheet reduction, so the two policies offset each other’s impact on financial conditions.
Mericle points out that this view differs materially from current Fed thinking.
Warsh believes the Fed’s asset holdings have played a “material part of …
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