President Trump has nominated Kevin Warsh to replace Fed Chair Jerome Powell in May.
Mungofitch has said that this is essentially the same as putting Trump in charge of the Fed. But there’s much more to the Fed than the fed funds rate (which Trump wants at 1%). Even if the FOMC drops the fed funds rate to 1%, which is doubtful because the FOMC is a committee and hopefully the members have more sense than that, the Fed controls many levers of the banking system. Trump obviously wants to juice the economy and markets but Warsh has plans that could move the dial in the opposite direction.
And it’s not at all sure that Warsh will do what Trump wants once Warsh is ensconced at the Fed with a 16 year term. As long as Warsh can ignore Trump’s bullying and insults the way that Powell has.
Saying You Want to Shrink the Fed Is One Thing. Doing It Is Another.
Kevin Warsh’s vision of ‘regime change’ at the central bank could mean tighter times for markets
By Telis Demos, The Wall Street Journal, Feb. 2, 2026
…
Warsh has written that the Fed balance sheet is “bloated,” and that its expansion has been one of the main drivers of inflation. Shrinking it, he argues, could allow for lower rates.
“If we would run the printing press a little quieter, we could then have lower interest rates,” he said last year in the Hoover Institution interview. “Because what we’re doing right now is, we have all this money that’s being flooded into the system, which causes inflation to be above target.”…
“Money on Wall Street is too easy, and credit on Main Street is too tight,” Warsh recently wrote. The Fed’s “largesse can be redeployed in the form of lower interest rates to support households and small and medium-size businesses.”
But thus far, when the Fed has sought to allow its balance sheet to shrink, often called quantitative tightening, at some point this has caused disruptions to markets. …
Getting unhooked from the era of easy money could bring some headaches along the way. [end quote]
Ya think?
Wall Street has become hooked on the crack cocaine of easy money for an entire generation, since Fed Chair lowered the fed funds rate after the 2000 dot-com crash and a succession of Fed chairs kept it too low through and past the 2008 GFC’s recovery and the Covid emergency.
At the same time that the low fed funds rate kept short duration yields low the Fed’s QE suppressed long duration yields.
The Fed’s suppression caused asset price inflation since the banks provided leverage for asset purchases like mortgage loans for homes. The monetary stimulus from the Fed doesn’t directly cause consumer price inflation like fiscal stimulus from Congress, which goes directly into consumer pockets as spending money.
Shrinking the Fed’s balance sheet, even if they simply allow their bloated book of bonds to roll off in time instead of selling them, will free the bond market to price debt. The asset markets haven’t seen a truly free bond market since 2008.
What happens when an addict suddenly has the drug withdrawn?
Never mind the fed funds rate. The screaming will come when the long term yields are allowed to rise. Banks may fail (like Silicon Valley Bank) when the value of even the safest bonds (Treasurys) plunge. Investors who bought bond funds (instead of constructing bond ladders) will see the NAVs melt away. Mortgage rates will rise, deflating the housing bubble. And the stock market will fall as the bond market pulls money toward higher-yielding investments.
Wendy