President Donald Trump's nomination of Kevin Warsh to succeed Jerome Powell as Chair of the Federal Reserve is already rippling through markets.
On Friday, U.S. stocks—tracked by the SPDR S&P 500 ETF (NYSE:SPY)—closed lower, the dollar strengthened, precious metals suffered a historic selloff, and crypto assets extended losses into the weekend—an early signal that investors are bracing for a potentially dramatic shift in how the Fed approaches growth, inflation, and its role in the economy.
1. Inflation Is ‘A Choice,’ Not a Trade-Off
Warsh rejects one of the Fed's most entrenched ideas: that low unemployment mechanically leads to inflation.
On Monday, veteran strategist Ed Yardeni wrote that Warsh views inflation as "a byproduct of unsound policy decisions," not the inevitable result of economic strength.
Warsh explicitly rejects the Phillips Curve framework, which still underpins much of the Fed's modeling.
"Warsh frequently slams the Fed for being ‘stuck with models from 1978,' referring to the traditionally relied upon Phillips Curve model," Yardeni said.
For markets, this raises a key concern: if the Fed stops tightening policy in response to strong labor data, will inflation expectations remain anchored?
2. Lower Rates—But Only With a Smaller Fed Balance Sheet
From a market perspective, this is where Warsh's thinking becomes most complicated.
David Mericle, economist at Goldman Sachs highlights that Warsh has consistently argued that interest rate cuts should be paired with balance sheet reduction, so the two policies offset each other's impact on financial conditions.
Mericle points out that this view differs materially from current Fed thinking.
Warsh believes the Fed's asset holdings have played a "material part of the inequality story," redirecting capital toward financial assets rather than the real economy.
"His views on balance sheet policy have caught investors' attention because they differ from the views of current policymakers," Mericle said.
He has also argued that the balance sheet has effectively subsidized government borrowing, making fiscal discipline easier to avoid.
"We would not expect a major reduction in the size of the Fed's balance sheet if Warsh is confirmed as Chair… but a more limited reduction is possible," Mericle added.
3. A Retreat From Data Dependence
Warsh has repeatedly criticized the Fed's reliance on monthly inflation and jobs reports.
In a 2023 Wall Street Journal article, he wrote the Fed "should get out of the business of forward guidance" and stop publishing interest rate projections.
Yardeni said Warsh views the Fed's current approach as "reactionary" and "backward-looking," arguing it creates unnecessary volatility.
Ending the dot plot or even post-meeting press conferences would mark a dramatic shift. For investors, that would mean less transparency—and a Fed that speaks far less frequently, but potentially acts with greater conviction.
4. A New Treasury-Fed Dynamic—and a Test of Independence
Perhaps the most controversial idea flagged by Yardeni is Warsh's call for a "New Treasury-Fed Accord."
Yardeni indicates that while the original 1951 accord formalized the Fed's independence, Warsh's version would encourage closer coordination with the Treasury while keeping the Fed's balance sheet smaller to "create space" for lower rates.
Yardeni openly questions whether this would weaken the Fed's independence in practice, even if it strengthens supply-side outcomes.
"He thinks fiscal policy's role is to spur production by keeping taxes low and regulations light, while monetary policy's role is to spur investment by keeping interest rates low," Yardeni said.
He warns that markets—especially bond investors—may not accept the idea that faster growth alone will stabilize deficits, particularly with rising defense spending and continued Treasury issuance.
5. A New Regulatory Regime For US Banrks
Warsh has also targeted bank regulation. According to Goldman’s Mericle, Warsh believes that current banking rules impose excessive compliance costs and have systematically disadvantaged small and medium-sized banks.
“He has said that regulators should be more open to consolidation by smaller banks,” Mericle added.
Warsh said regulators should "say we're open for business" on consolidation among smaller lenders.
On the global stage, Mericle notes that Warsh has pushed back hard against Basel rules, arguing that "Fed leaders have tried to bind U.S. banks to a complicated, vaunted set of rules in the name of global regulatory convergence," while insisting that "the Basel endgame isn't America's endgame."
Warsh has called instead for "a new, reformed American regulatory regime" that would "make the U.S. the best place for the world's banks to do business," a shift that could materially reshape the competitive and risk landscape for the U.S. banking system.
Why Markets Are Uneasy
Kevin Warsh is calling for a "regime change" at the Fed—something far bigger than a routine policy adjustment.
Warsh is not trying to fine-tune the cycle; he is questioning the models, assumptions, and communication framework the Fed has relied on for decades.
That creates uncertainty. Many of his views diverge sharply from current policymakers and would likely face resistance inside the FOMC, where consensus and continuity have long guided decision-making.
Markets are uneasy because Warsh isn't signaling stability—he's signaling a shift that could redefine inflation, interest rates, and risk pricing all at the same time.
Image: Shutterstock
