Warsh in His Own Words
Doug Nolan
Prospects for timely resolution of Strait of Hormuz issues appear bleak.
WTI crude surged $10.55, or 12.6%, this week to $94.40.
The Bloomberg Commodities Index’s 3.5% rally boosted 2026 gains to 24%.
Ten-year Treasury yields rose five bps to 4.30%, outperforming other vulnerable bond markets.
UK Gilt yields jumped 15 bps to 4.91%, with Italian yields up 10 bps to 3.78%.
Major equities indices were down 4.3% in Spain, 3.2% in France, 2.3% in Germany, and 2.5% in Italy.
Not a worry in the world, major U.S. indices closed the week at record highs.
Senator Katie Britt:
“I think we would all say you are absolutely the right man for the job at the right time in our country’s history, and I am excited about your leadership at the Fed.”
Senator Dave McCormick:
“He is the right man for this pivotal moment.”
I am reminded of 2018 when Jay Powell took the reins of the Federal Reserve - in what was a pivotal period for monetary policy.
Fed assets had inflated $1.6 TN (56%) over the previous five (non-crisis) years to surpass $4.4 TN.
The new Chair’s plan was to significantly shrink the Fed’s balance sheet.
I strongly supported what I believed was Powell’s intention to reduce the Federal Reserve’s footprint, while beginning the process of forcing distorted markets to stand on their own.
Well, QT was abruptly abandoned the following year.
In a major policy error, the Powell Fed inflated holdings by $400 billion in the months prior to the pandemic.
Fed assets surpassed $7 TN by June 2020 - on their way to the $8.924 TN March 2022 peak.
As much as I respect Jay Powell as a dedicated public servant and man of integrity, his chairmanship was a failure.
Much was out of his control – the pandemic, speculative markets, and historic Bubble dynamics.
He will now hand the controls to Kevin Warsh, with highly levered markets more speculative and Bubble inflation only more precarious.
Listening to Kevin Warsh’s Tuesday Senate confirmation hearing, my thoughts also drifted back to Ben Bernanke.
Dr. Bernanke was welcomed into the Board of Governors as the foremost expert in reflationary policymaking.
The tech Bubble had burst, and Washington was in pursuit of academic theories to support aggressive stimulus measures.
The incredible “success” of Bubble resuscitation ensured Bernanke as successor to “The Maestro” Alan Greenspan.
An unthinkable $1 TN crisis-period expansion of the Fed’s balance sheet seemed almost normal.
Pendulums can swing.
These days, it’s a Federal Reserve system in desperate need of reform.
Everything’s a mess.
Inflation has become a major political issue.
Much of the American population is aghast at the cost of living and egregious inequality.
The American dream is being shattered.
Uncertainty and instability seem to have infected all aspects of life, from the economy to markets and politics.
The country is so deeply divided.
And over recent decades, the Fed has evolved from miracle-maker to the root of all problems.
Kevin Warsh, apparently, is the guy to fix our central bank and solve our problems.
I never had the sense that anyone really understood Ben Bernanke’s radical inflationist analytical framework and its ramifications.
Back even further, to this day few appreciate the nuance of Alan Greenspan’s transformative central banking and the momentous role it played in fostering unchecked non-bank Credit expansion, fundamentally loosened financial conditions, and resulting asset inflation, speculation, and Bubbles.
Warsh:
“I think the biggest economic policy error in 40 or 50 years happened just a few years ago, and we’re still living with the remnants of it.
I think inflation is less problematic than it was a couple of years ago…”
The harsh reality is that major policy errors have been compounding for decades.
Myriad inflationary issues have significantly worsened over recent years, having become deeply embedded in market, financial and economic structures.
I appreciate John Authers’ Friday Bloomberg piece, “The Shape of a Deal to Come - Warsh Needed to be Asked about the Treasury Takeover of Monetary Policy.”
I’ve viewed Warsh as a man of integrity and character.
I don’t doubt he seeks to do what’s best for our nation.
But we live in most unusual times.
The Fed remains hostage to market Bubbles.
The Trump orbit is powerfully coercive and pernicious.
Mr. Warsh, of course, was peppered with questions regarding commitments he might have made to secure the President’s appointment.
Warsh:
“The president never asked me to predetermine, commit, fix, decide on any interest rate decision in any of our discussions, nor would I ever agree to do so.”
“Now, the President, as you might know, much like virtually all presidents I’ve either known or studied, presidents tend to be for cutting rates.
I think the difference is President Trump expresses it quite publicly without surrogates or subterfuge, but presidents want lower rates.”
“Like everyone else in the committee in the world, I’ve heard his view on interest rates.
It sounded very similar to me to every other president in economic history that I’ve studied.”
I’ll take Kevin Warsh at his word that he did not commit to President Trump to cut rates.
But Warsh’s repeated attempts to normalize the unprecedented pressure levied on Chair Powell and the Board of Governors fell flat.
I have no idea what meeting of the minds on rate policy developed between Warsh and Secretary Bessent.
But there should be little doubt that the two of them came to terms with expectations for major reform – I hate to say “disruption” – at the Federal Reserve.
Expect an extraordinarily close working relationship between the new Chair and Treasury Secretary.
Warsh:
“The economic statecraft agenda led by Secretary Bessent and Secretary Rubio is an important one.
On that, the Fed will play a supporting role in ensuring that the financial system is as safe as it can be and work with them, because it’s outside of the conduct of monetary policy, to ensure the U.S. is on its front foot and in a position of strength during this period of rivalry between the U.S. and another nation around the world.”
“So, the sooner that we can hit the ground running on reform agenda, the better.”
“Working with the Treasury Secretary, we’re going to have to find a way in which we can take the balance sheet and make it smaller, because a large balance sheet where the Fed owns more outstanding debt than many parts of the financial markets, that’s fiscal policy in disguise.
The Fed needs to get out of the fiscal business, focus on the monetary business, so the Fed can deliver on the remit you gave us.”
Kevin Warsh and Scott Bessent have important connections and philosophical influences.
Legendary hedge fund operator Stanley Druckenmiller was instrumental in Bessent’s hiring at George Soros’ Quantum Fund in 1991.
Warsh has been employed for years by Duckenmiller's family office.
“In the last 15 years, I’ve gained deep experience in macro and in markets working with Stan Druckenmiller.
He never held a position in government, but is no less a patriot.”
Listening to Warsh’s confirmation hearing, one hears Druckenmiller undertones.
I admire and respect Druckenmiller’s macro analysis and share key aspects of his analytical framework.
He believes that central bank independence and credibility are critical.
In the markets, liquidity analysis is key.
Druckenmiller is skeptical of “easy money,” and views central bank liquidity as fundamental to asset inflation and Bubbles.
He is said to closely monitor the Fed’s balance sheet.
While having agreed in 2008 with Bernanke’s $1 TN QE program, Warsh has since become an outspoken critic of QE and the Fed’s bloated balance sheet.
Warsh:
“The balance sheet tool disproportionately helps those with financial assets.
The interest rate tool hits the entire economy.”
“The Fed balance sheet has played a particularly, I think, unhelpful role in helping the Fed achieve its dual mandate…
The Fed is not blameless in that as it’s grown - the Fed’s balance sheet has grown its imprimatur on the economy.
Those with financial assets have benefited from it.
The reason why I prefer monetary policy to use interest rates as the dominant force is interest rates affect a far broader cross-section of the economy. Interest rates get in the cracks.
If we were to cut rates, then broader number of people will benefit from it versus quantitative easing, which tends to move through financial assets first.
Half of our fellow Americans don’t own any financial assets, so they’re wondering what’s in it for them.”
“My view is the interest rate tool gets in the cracks.
It’s fairer.”
Kevin Warsh’s focus on the Fed’s balance sheet is a red herring.
First, the likelihood of meaningful contraction in Federal Reserve assets is remote.
More likely, the prospect of balance sheet restraint will be used as justification for lower rates.
And the argument that the Fed’s balance sheet is the culprit behind extraordinary wealth inequality, with lower rates an equalizing force, is much too simplistic at best.
Truth be told, the Fed’s balance sheet is today not the critical issue.
Fighting the last war.
No matter how much he excoriates QE and a big balance sheet, markets have no doubt that Chair Warsh will champion open-ended QE at the first indication of destabilizing market liquidity issues.
Let’s examine some numbers: From its March 23, 2022, peak to the December 10, 2025 trough, Fed Credit contracted $2.206 TN (25%) to $6.490 TN.
Meanwhile, over the same period, the S&P500 inflated 63%, the Nasdaq100 84%, the Semiconductor Index 132%, the MAG7 Index 165%, and Nvidia 618%.
Over the past few years, the thesis that the Fed’s balance sheet dictates marketplace liquidity, asset inflation and wealth distribution has completely broken down.
More numbers: From March 23, 2022, to December 10th, 2025, Money Market Fund Assets inflated $3.094 TN, or 68%, to $7.655 TN.
It is market-based finance - rather than the Fed – that has been behind historic liquidity creation, asset inflation, speculative Bubbles, and socially-destructive wealth inequality.
More specifically, from Q2 ’22 through Q4 ’25, Broker/Dealer Repo liabilities surged $1.201 TN (74%) to $2.828 TN, while Rest of World Repo liabilities inflated $793 billion (68%) to $1.954 TN.
Even more granular, Hedge Fund Prime Brokerage Borrowing surged $1.616 TN (98%) between the end of 2022 through 2025 - to $3.262 TN, while Hedge Fund Repo Borrowing inflated $2.152 TN (175%) to $3.379 TN.
Ballooning Wall Street and hedge fund balance sheets have left the Fed in the dust.
It’s also worth noting that since the Fed began cutting rates on September 18, 2024, the S&P500 has returned 29.7%, the Nasdaq100 42.1%, the MAG7 Index 54.6%, Nvidia 80.3%, and the Semiconductor Index 116.8%.
The Fed has repeatedly reduced rates despite exceptionally loose financial conditions and speculative markets.
Consequences have been predictable.
Speculative Bubbles have gone to only greater excess, while inflation has remained elevated.
We’re now into the sixth year of inflation above the Fed’s target, with dim prospects for price stability.
Warsh:
“Inflation is the Fed’s choice.”
The Fed refused to sufficiently tighten monetary policy to break inflationary pressures.
Moreover, each passing year of elevated inflation only increases the pain and dislocation necessary to force inflation back down to 2%.
No one sees a hawkish Chair Warsh marshaling such an effort.
Warsh:
“I think the essential elements of a new policy for the Federal Reserve is to get access to better data and to dig deeper into the productivity possibilities that can come out of this new investment wave.”
“What I’m most interested in is what’s the underlying inflation rate, not what’s the one-time change in prices because of a change in geopolitics or a change in beef, but what’s the underlying generalized change in prices in the economy.
And my broad sense is that these inflation risks and the inflation damage the last several years is improving somewhat. It has improved somewhat in the last year.
The measures I prefer are looking at things that are called trimmed averages, where we take out all of the tail risks, all of the one-off items, and we ask ourselves whether the generalized change in prices is having second order effects on the economy.
Again, they’re not where they should be, but I think that the trend is quite favorable.”
“And what I’m really most interested…, what’s the change of that 500 millionth and one price?
Because that’s inflation.
That’s a change in the generalized level. In a market economy, prices change all the time.
And I don’t want to be confused by that.
I want to know what inflation really is.
And I still think there’s some work to do.”
“I don’t think inflation comes about when the economy grows too much or hardworking Americans get an increase in their wages.
I think inflation comes about when the government prints too much, by which I mean the central bank.
And broadly speaking, the government spends too much.”
“If I can clarify two things: One, there’s a difference between the change in prices and inflation.
The change in prices happened in a market economy.
When inflation moves up, that’s because the Fed had something to do with it.”
“I’m going to paraphrase former Chairman Paul Volcker, where he said something along the following lines: You would need to have a Ph.D. from an elite institution to believe that inflation doesn’t have something to do with money.”
Kevin Warsh’s analysis of inflation lacks cohesion and clarity.
At this point, escape all the confounding complexity and subterfuge - and just focus on headline inflation.
Issues related to climate change and geopolitical instability have become fundamental to enduring inflationary pressures.
Considering the inflationary backdrop and worsening national affordability crisis, the lack of resolve to seriously address this most critical issue is problematic.
Inflation is fundamentally a consequence of Credit excess.
It’s always easy to scapegoat the expansion of Fed “money.”
But today’s broad-based inflationary pressures - from CPI to stock/securities/asset prices - are the upshot of precariously loose financial conditions.
Market liquidity excess is primarily due to the expansion of repo borrowings and other sources of speculative leverage.
Booming markets then foment self-reinforcing debt issuance, lending, and risk-taking excesses.
At this point, a problematic tightening of conditions will be necessary to quash deep-rooted inflationary dynamics.
Warsh:
“Interest rates are the much better way to be using monetary policy than buying bonds and mortgages, some of which are issued from the United States Treasury Department.
That is a confusion of roles.
That leads to a set of mission creep.
So, interest rates are the dominant tool, and interest rates, as I mentioned, get in the cracks.”
“But in the ordinary course, the central bank, an independent body, should not be adopting a set of policies that have that kind of distributional consequence.
That’s why interest rates are a better way to be setting monetary policy.”
Going back to the nineties Bubble period, through the mortgage finance Bubble, and over recent years, Fed interest-rate policy has been a primary catalyst for asset inflation and resulting “distributional consequences.”
Greenspan in the early nineties used aggressive rate slashing and yield curve manipulation to spur market-based Credit growth and asset inflation.
A powerful tool was unleashed that evolved into QE and myriad reflationary measures.
It was interesting.
During Mr. Warsh’s lengthy confirmation hearing, the only mention of “Credit” was with “Credit default swaps” and “Credit cards”.
“Financial conditions” went unspoken.
Of course, hedge funds, private Credit, speculative leverage, and Wall Street excess were MIA.
Warsh did, however, make an interesting reference to mortgage finance Bubble excess:
“I think subprime mortgages then, subprime assets then, were indicative of prices of almost every financial asset that were mispriced.
What I suggested then and what I believe now is that subprime mortgages were just indicative of a set of prices that were incorrect, and they all repriced.”
It’s the type of sound analysis I expect from Warsh - that similarly applies today to “private Credit” and prices of almost every financial asset (at home and abroad).
It’s not as if today’s Bubble is inconspicuous.
I can imagine Warsh, Bessent and Druckenmiller huddled in discussion of the state of today’s unprecedented Bubble environment.
They surely recognize the devastating consequences of Bubble collapse.
And I assume they would put the interests of our nation ahead of theirs and the hedge fund industry.
But I do envisage the billionaire contingent strategizing a sophisticated scheme for holding Bubble collapse at bay.
Further delaying the day of reckoning is such risky business – only ensuring a greater cataclysm.
The Trump administration will undoubtedly do anything and everything to sustain the boom.
They have a plan. Furthermore, Trump, Bessent, and the team have been fixated on harnessing the great power of the Federal Reserve to further their ambitions.
He may not have been the President’s first choice, but Kevin is now their man.
Warsh:
“America’s economic growth potential is rising as we sit here today…
The supply side of the economy is changing dramatically.
I think the economy’s potential is growing quite quickly.”
“The potential of the economy, the real results of the economy are improving, but I think it can improve more.
And I think in the years ahead, I think the economy’s potential is strengthening.”
“We don’t have a long time to do new studies and contemplate what reform should be.
We have a short window to try to bring inflation back down to where it should be to ensure price stability, and because AI that Senator Kennedy referenced is so consequential and AI is quickly becoming at something like escape velocity, it’s important to revisit the Fed’s models and see whether this innovation cycle, while it could have over time improvements in the price level and make the Fed’s job on inflation easier, there’s a question about what that means for employment, which is another part of the Fed's mandate.”
Senator Lisa Blunt Rochester:
“Well, I think there’s been a lot of conversation here about concerns that in your record, in your history, you have been hawkish on inflation rates and keeping them low.
And now we’re looking at AI.
What I don’t want to see is us use AI as an excuse...”
Warsh:
“Yes.”
Rochester:
“...for making good policy. Too much depends on it.
Too many families’ lives depend on it.
And in our conversation, I also talked about the fact that I know Wall Street is going to be okay.
But who we’re concerned about as well is Main Street.”
Warsh:
“Yeah.”
This “AI productivity will support lower interest rates” theorizing is reminiscent of Alan Greenspan’s nineties bubble notion, where technology advancement was to have raised the economy’s “speed limit” – allowing the Fed to accommodate a hotter running (Bubble) economy.
Today, more than ever, the backdrop demands a Fed laser-focused on controlling inflation.
We need sound, conservative, traditional monetary management – sans experimentation and New Paradigm ruminations.
I’ll add that dynamics which foster loose conditions – certainly including the AI arms race – should be countered by higher Fed policy rates.
I wish nothing but great success for Chair Warsh.
I hope he is indeed the right person for such a pivotal period.
But I fear a polarized Fed.
This may in theory be an opportune juncture for policy regime change.
In reality, fragilities make a major overhaul an especially risky proposition.
The new Chair needs to maintain healthy distance from the Trump administration.
It’s anything but clear that will be possible.
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