It is likely that Kevin Warsh will be confirmed as the next Federal Reserve Chair. Senator Thom Tillis, a previous hold-out, wrote on X on Sunday April 26, that, “I look forward to supporting Kevin Warsh’s confirmation.” That’s because the Department of Justice appears to have dropped its criminal investigation into Jerome Powell, which Tillis was strongly opposed to as a challenge to the Fed’s independence.
If so, Warsh could become Fed Chair in May and Chair his first meeting of the Federal Open Market Committee on June 16-17. Warsh outlined in his confirmation hearing on April 21, that he plans “regime change” at the Fed with reduced emphasis on forward guidance, a smaller balance sheet and more focused role for central bank on a narrow definition of monetary policy. These initiatives are in keeping with Warsh’s previous statements. However, the overall path for monetary may be similar to under Powell according to market expectations.
A Diminished Role For Forward Guidance
Warsh may seek to dial back forward guidance from the Fed. This is when policymakers suggest how monetary policy may trend over the coming months. This was used during the financial crisis to signal that rates would remain low for a sustained period, helping to manage market expectations. However, Warsh sees forward guidance as less useful during normal economic environments and believes it has the potential to hamper effective policymaking if the Fed is pre-committed to a particular course of action.
A Smaller Fed Balance Sheet
The Fed’s balance sheet has grown dramatically during the financial crisis and pandemic. Before the financial crisis, the Fed’s balance sheet holdings were under $1 billion, in 2022 they peaked at over $8 billion. That’s due to several rounds of quantitative easing where the central bank typically adds more cash to the economy to drive interest rates lower by purchasing bonds directly. Since then the Fed has sold assets down to a little under $7 billion, but the balance sheet remains very large compared to pre-2008 levels.
Warsh has said he favors a smaller balance sheet with a focus on the Fed holding Treasury securities, rather than a broader portfolio of assets. All else equal, the reducing the large size of the Fed’s holdings had the potential to drive interest rates somewhat higher to the extent the Fed sells off its holdings at scale. The Fed’s balance sheet holdings today represent approximately 20% of outstanding government debt.
A Tighter Focus on Monetary Policy
Warsh plans to focus the Fed more narrowly on monetary policy. This means that the Fed may have less to say about topics such as the environment or diversity. Warsh has signaled that he plans to keep the focus on the Fed’s economic mandates of controlling inflation and maintaining full employment. He also believes that performing well against these goals will help the Fed with its independence.
Market Expectations
Despite these details from Warsh, monetary policy expectations currently remain somewhat similar for Warsh as compared to Jerome Powell according to fixed income markets. That means that interest rates could move lower in 2026, but, for now, the most likely outcome is that interest rates are held steady for the remainder of the year. A fundamental trade-off remains as tariffs and the Iran conflict have pushed inflation a little higher, implying incrementally higher interest rates even if inflation is down from previously high levels. Set against that, the labor market is being closely watched, signs of labor market weakness might encourage the Fed to cut interest rates, but for now, the labor market has held up better than many expected, even if the rate of hiring has declined.
Beyond Warsh’s appointment, it also remains to be seen whether Powell will remain on the FOMC after his role as Chair ends and how the Supreme Court will rule on Governor Lisa Cook’s potential firing. Those two topics also have the potential to impact near-term monetary policy.
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