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Point of View · 01.30.26
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A Conventional Choice for Fed Chair, and Likely Defender of Independence
The expected nominee for Fed chair likely will be a strong advocate for Fed independence.
- Markets & Economy
- Federal Reserve
- Monetary Policy
- Central Banks
Key Points
Trump’s expected selection of Warsh is the most conventional choice of the leading candidates.
The Senate confirmation process may be slowed over controversial investigations into the Fed.
The Treasury yield curve steepened modestly, as Warsh may require a higher bar on using quantitative easing to lower rates.
Among the three leading contenders for Federal Reserve chair — Kevin Warsh, Kevin Hassett and Rick Rieder — U.S. President Donald Trump apparently will choose the most conventional one in Warsh, with the most recent Fed experience. We expect him to be a strong defender of independent monetary policy.
Presumptive nominee Warsh knows the inner workings of the institution well, having served as a governor from 2006 to 2011, during most of Chair Ben Bernanke’s term. As a Fed board member with significant financial-market experience, he was a key lieutenant to Bernanke as the Fed responded to the many financial market disruptions brought about by the 2008/2009 global financial crisis.
Knowing the institution, particularly the inner workings and internal dynamics of the Federal Open Market Committee (FOMC), means that he is more familiar than most with the impressive power and authority of the chair. But he also is well-versed on the limits of that power and authority. In particular, he undoubtedly knows that he will have to lead through the power of persuasion as he tries to build a consensus among FOMC policymakers around his policy preferences and views.
An Abnormal Nomination Process
Under normal conditions, a Warsh nomination would face no major hurdles in the Senate, where he has to be confirmed before taking the Fed’s helm. But since the most recent escalation of tensions between the administration and the Fed, conditions have been far from normal as far as the Senate confirmation process for a Fed position goes. In particular, following the administration’s controversial criminal investigation of Chair Jay Powell, at least two Republican senators (Thom Tillis and Lisa Murkowski) have threatened to oppose any Fed nomination until all legal matters surrounding Powell are resolved. We expect Warsh to be eventually confirmed, once he’s formally nominated, but it might take longer than usual.
Treasury Curve Initially Steepens
Judging from the initial reaction of the Treasury yield curve, the financial markets seem to have taken the reported Warsh nomination in stride. The curve has steepened a bit, but the move is well within the range of normal as far as daily fluctuations go. Directionally, a steeper curve seems consistent with Warsh’s perceived higher hurdle for using quantitative easing to lower rates in the future, as well as his stated preference for a smaller Fed balance sheet. But those preferences need to be taken within the context of financial market stability, and Warsh knows the financial market well.
A Strong Advocate for Independent Monetary Policy
What might a Warsh Fed look like? It depends. There are two main sides to the Fed: monetary policy and financial supervision and regulation. On monetary policy, we expect him to be a strong voice for Fed independence. Incidentally, the market seems to agree (at least initially), as longer-horizon breakeven inflation rates — a key barometer of Fed credibility — have not moved much on the news of his impending nomination. On non-monetary-policy matters, given his well-known criticism of mission creep at the Fed, he will likely lend further support to the changes that are already underway under Vice Chair for Supervision Miki Bowman.
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