Kevin Warsh and changes at the Fed

Investment Analysis Clubs Macro Economic Trends and Risks
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https://www.nytimes.com/live/2026/04/24/us/trump-news

Trump Administration Live Updates: Justice Department Closes Inquiry of Federal Reserve Pushed by Trump

The Justice Department, in a stunning reversal, announced on Friday (today, 4/24/2026) that it was dropping its criminal investigation into the Federal Reserve and its chair, Jerome H. Powell. The decision could clear the path for Kevin M. Warsh, President Trump’s pick to lead the central bank, to win confirmation…

A top Republican on the Senate Banking Committee, Thom Tillis of North Carolina, vowed to block any of Mr. Trump’s nominees until the legal threats against Mr. Powell were dropped…

If Mr. Warsh is not confirmed by May 15, Mr. Powell has said that he would stay on as chair on a temporary basis. He can technically remain a member of the Fed’s board of governors until 2028. …[end quote]

Assuming that sanity prevails and Mr. Warsh is confirmed as Fed Chair, here are his concepts that would directly impact our investments.

https://www.nytimes.com/2026/04/24/us/politics/kevin-warsh-fed-rates-balance-sheet.html

How Kevin Warsh Could Shrink the Fed’s Footprint in Financial Markets

President Trump’s nominee to become the next chair of the Federal Reserve wants to overhaul the central bank, including its more than $6 trillion balance sheet.

By Colby Smith, The New York Times, April 24, 2026

…
Mr. Warsh wants the Fed to have a smaller footprint in financial markets and for there to be closer coordination with the Treasury Department on what the Fed holds in its portfolio and what the government issues in terms of debt to fund itself. Mr. Warsh has argued that reducing the central bank’s holdings will give officials space to lower interest rates, something President Trump has long desired. The rationale is that longer-term rates are likely to rise as the balance sheet shrinks, which then could be offset by lowering short-term rates. [I agree that longer-term rates are likely to rise as the balance sheet shrinks but I don’t understand how it follows that short-term rates should be lowered if inflation is still high and the economy is not slowing. This may be a bait-and-switch to win the support of President Trump who wants lower rates. – W]…

[snip a long discussion about bank liquidity]

For Mr. Warsh, closer coordination between the Fed and Treasury would also help. Mr. Warsh has floated a revamp of a 1951 agreement that established the Fed’s monetary policy independence while giving Treasury control of government spending and taxation. What a new “accord,” as Mr. Warsh has called it, is likely to entail at a minimum is an alignment in what securities the Fed is willing to hold on its balance sheet and what Treasury wants to issue in terms of government debt. The department’s preference now appears to be Treasury bills, which Mr. Warsh seems to favor for the Fed as well.

Concerns about how independent the Fed will remain under Mr. Warsh has caused concern, however, that closer coordination between the two institutions will just be a first step toward the Fed becoming more enmeshed in the administration. At worst, economists fear some version of “fiscal dominance,” in which the Fed begins to prioritize the government’s financing needs over controlling inflation…[end quote].

Fiscal dominance is a common characteristic of governments that are heading toward bankruptcy, along with currency debasement. The right hand (the central bank) buys the debt of the left hand (government deficit spending), bypassing the bond market’s reluctance to continue buying the debt. Fiscal dominance suppresses interest rates and shuts out borrowing by the real economy.

Kevin Warsh has said that the Fed is too involved in bailing out the government by buying Treasury debt. He seems to think that taking away the punch bowl will stop Congress from spending. I don’t know what universe Warsh is living in. The majority of the government debt is because of entitlement spending reinforced by tax cuts. Nothing the Fed does will influence Congress to change spending and taxes.

The most direct impact of Warsh’s policies would be higher long-term interest rates. That’s really bad for the bond market and could cause bank failures. (Silicon Valley Bank failed in 2023 because their long-term Treasuries lost value when the Fed raised interest rates.)

Financing the ballooning debt with Treasury bills, which are short-term debt, makes forecasting the debt harder since it would constantly be changing. Treasury should have re-financed the debt to 30 year Treasuries in 2020 when yields were low.

Wendy

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Then again, a dearth of bids on Treasury debt might.

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Everyone knows reducing deficit is important, but neither party wants to make any changes to their favorite programs. So, Fed’s only influence is in their buying treasuries. Even there, Kevin’s hand might be forced by the market and the other members. Especially if Jay Powell decides to hang around till 2028, it will limit Kevin’s influence. I would like Jay Powell to stay as governor, just to annoy Trump.

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@SuisseBear that’s not how the American government system works.

A dearth of bids on Treasury debt would increase interest rates. That would increase the government deficit. But it would not directly impact expenditures the way it might in your household.

Instead, expenditures are fixed by laws that were written many years ago. This is especially true of so-called “entitlements” which are 59% of the U.S. budget. A huge bloc of voters benefits from these entitlements, which include Social Security, Medicare, Medicaid (75% of entitlement spending), unemployment and veteran’s benefits.These laws are written by Congress. The Federal Reserve cannot change these laws in any way.

When the forecast for the entitlements appears especially dire, the Congress may vote to change the rules. But these changes usually involve taxation of the entitlement benefits, changes in when beneficiaries can claim the entitlements and other tinkering around the edges.

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If interest rates rise the segment toward Net Interest would grow but entitlement spending would not shrink. Instead, the deficit would rise and/or discretionary spending (infrastructure, research, National Parks, etc.) would be cut.

Wendy

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Many folks fancy that somehow US is going to go bankrupt, to all sorts of theories. Republican famous starve the beast… In the end, GOP wants to cut income tax, democrats and republicans want entitlements to continue.

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Wendy, what I wanted to hint at with my terse response: if there were a Treasury debt buyers strike, with buyers not found at all, or only at say two-digit interest rates, that would make the administration and Congress sit up, and eventually change behaviour. Especially if the Fed stands by idly.

Even the current administration watches the ten year more than they would care to admit, occasionally triggering TACO moves.

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The FED is the second largest holder of our debt. The American public is first. The American public is not tired of buying the debt. In a loss of confidence in the stock market, the public will buy our debt. But the man has said he’d like to renegotiate the terms. J6P learns years later that he was misinformed. Rinse and repeat. If all else fails, the FED will buy the debt.

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The public generally believes that for decade after decade after decade. Occasionally someone honest will say that is not true. Increasing the real GDP growth matters. We need a tax policy to incentivize building more factories, incentivize more productivity, and to spend more on R&D in the corporate world.

Monetary influence is far more extensive than that. It influences growth, inflation, and employment. It decides whether the value of the dollar is maintained. It encourages the USD as the reserve currency. It counterbalances fiscal policy to those ends.

Both men are intellectually capable. While Warsh has made major overtures for the job, the realities of FED governance make him perfect for the job. Study his background. He is a very strong professional. The man may be blaming Warsh literally 3 months from now, worse than he ever blamed Powell. Just because he hires you does not mean you are exempt from the garbage talk.

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The GOP does not have pro growth policies. Cutting taxes has never grown the economy. It does produce more inflation.

The Democrats are discussing a middle class tax cut. I think it is just to get in before being called out for raising taxes. I think the Democrats mean to cut the taxes on the middle class. The discussion has not turned to raising taxes on corporations and the top bracket. Those policies would substantially grow the US economy. We could suck the industrial life of the globe into the US. We currently are not managing our economy well at all. Most Americans are very aware of this.

A much higher corporate tax rate would incentivize corporations earning money in the US and elsewhere to invest much more heavily in the US. The top bracket income tax rate being much higher would dissuade the executive class from incentivizing only themselves. That last incentive for executives is worthless.

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More important than anything is to fund smart well designed programs and to stop wasting on stupidities. USA spends enormously on idiotically stupid calcified healthcare due to a medical-corporate complex almost as horrifically stupid as “defense” spending. My test of seriousness of most politicians and political conversations starts there.

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Mine does as well. The number one economic issue is universal healthcare.

But I am stuck with other important issues that we have to decide on.

The fear of purple voters is holding back our economy.

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