At long last, Trump has named Jerome Powell’s successor after a volatile public search (see Figure 1).

The nominee, Kevin Warsh, served as Governor of the Federal Reserve Board from 2006 to 2011, and was also a top contender for Fed Chair in 2017, losing out to Jerome Powell.

Since Warsh’s nomination announcement, the dollar strengthened somewhat, while bond yields barely budged, perhaps because of his reputation as a hawk during his time on the Fed Board.

More recently, though, Warsh has aligned himself with the President’s preference for rate cuts, citing rising productivity as the channel for further disinflation. 

We evaluate Warsh’s previous track record and recent comments, but again preach calm amid concerns about a sea-change in monetary policy and threats to central bank independence.

Spotty Performance

First, while Warsh recently called the Fed’s growth and inflation forecasts “terrible,”¹ his own track record can be characterized as someone who has “spent his time inventing new, incorrect rationales for his old, incorrect policies.”² 

Warsh was basically wrong about everything during his time on the Fed Board (2006-2011). He was overly focused on inflation throughout his tenure, even though the average year-over-year core inflation rate from 2006 to 2011 was 1.8% and the average unemployment rate was 7.1% (see Figure 2).

Worse, Warsh voiced concerns about the “upside risks to inflation” and advocated for the Fed to begin removing support “faster” for the economy in April 2009 to avoid inflation re-acceleration, when the economy was still deep in one of the worst recessions in history with core inflation falling below 1% and the unemployment rate topping 9% (see Figure 2 again)!³

Further, a common thread through all of his views in the last 15 years has been the Fed’s balance sheet.

Before Warsh resigned from the Fed Board in February 2011, he warned that expanding the Fed’s balance sheet (Quantitative Easing, or specifically QE2) could stoke inflation if “recent weakness in the dollar, run-up in commodity prices, and other forward-looking indicators are sustained and passed along into final prices.”⁴ 

While the Fed balance sheet-centric view was fairly popular among investors at the time, it has been discredited by history, as the link between the size of the Fed’s balance sheet and inflation and asset prices is more complicated. From 2011 to 2019, the Fed’s balance sheet grew by 71%, but year-over-year core PCE inflation was above the Fed’s 2% target in only 5 of the 108 months (and in those five months, core PCE was less than 0.1 percentage point above target; see Figure 3). 

Only during the pandemic did the Fed’s asset purchases really contribute to inflation, but that was coupled with a supply chain crisis and large fiscal stimulus. More recently, the Fed’s balance sheet has contracted by $2.3 trillion since March 2022 (through Quantitative Tightening, QT), and equities still remain close to all-time highs last week (see Figure 4). 

Circumstances Dictate Actions

Second, and fortunately in this case, old views often have little bearing on a new Fed Chair, especially amid new events.

Powell is a great example. Similar to market concerns about Warsh’s independence, there were also concerns in 2017 that Powell’s appointment “has strong political undertones” and fears that the Fed may “promote excessively accommodative monetary policy…to meet the president’s call.”⁵ Instead, Powell hiked rates by 100 basis points after he was sworn in as Chair and became a celebrated figure in his strong upholding of central bank independence. 

Markets were also worried about Powell as the “first Fed chair in four decades who does not have a degree in economics.” Turns out, Powell fell into the “inflation is transitory” trap during the 2021-22 inflation outbreak, supported by traditional economic theories, and the Fed fell behind the curve on rate hikes, like most of his fellow Committee participants with vast economic backgrounds.

Some investors also worried in 2017 about “how aggressive Mr. Powell would be in responding to an economic slowdown.”⁶ Others pointed to his skepticism about unconventional measures and called into question whether Powell would be “as willing as Mr. Bernanke and Ms. Yellen to use [QE] tools again.”⁷ 

Indeed, like Warsh, Powell was also supportive of balance sheet normalization.⁸ Yet he was quick to cut rates and implement the largest QE in history at the onset of the pandemic. As of January 2026, the Fed’s balance sheet had surged 130% since Powell became Chair—not because his view has changed but because he believed QE was necessary to support the economy (and maybe supported it a little too much). The Fed also implemented new “unconventional tools,” such as the Bank Term Funding Program (BTFP), which provided additional bank funding during the 2023 SVB crisis.

When evaluating Warsh’s past comments, it’s important to remember that, as with Powell, plans matter, judgment matters, but events ambush everyone.

The Fed Is A “They,” Not An “It”

Third, Warsh may not fundamentally change how the Fed operates.

Warsh’s own view is that “the Fed doesn’t need a revolution…what it needs is some degree of restoration.”⁹ In other words, he wants a return to a traditional central bank role—conducting monetary policy to ensure price stability and full employment, keeping a small balance sheet, and providing support to the economy only in crisis. 

More importantly, as we’ve mentioned before, the Fed is not an institution dictated by a single person. Instead, the FOMC operates as a 19-person committee. Monetary policy, which includes setting the fed funds target range and conducting open market operations (QE/QT), is decided by a majority vote of 12 participants, of whom 5 are rotating regional reserve bank Presidents who don’t look to the Executive Branch for nominations or approval. If Powell chooses to serve out his term on the Fed Board (through January 2028), then Warsh will replace Miran—possibly trading one “dove” for another “dove”! In short, the institutional structure means monetary policy could change very little in 2026. 

Remember, the FOMC Chair's role is primarily to aggregate ideas and represent the Committee to the public, rather than dictate the path of interest rates. Of course, previous Fed Chairs, like Powell, strive to form a consensus among participants. Warsh’s approach might differ, as he has said he would welcome more robust discussions. Interestingly, while Warsh was considered a “lone hawk” during his previous tenure on the Fed board, he never dissented against any Fed actions during his five years.¹⁰ He remained on good terms with Chair Bernanke by the time he quit, even though the Chair held an opposing view on the balance sheet.

Further, according to his recent comments, Warsh may consider changes to the structure and frequency of the Summary of Economic Projections (SEPs), the frequency of policymaker remarks, and perhaps pull back on “forward guidance” at FOMC press conferences. However, any material change in the size of the Fed’s balance sheet would likely necessitate a rethink of the Fed’s operating framework, as the Fed’s asset levels flow directly from the amount of reserves (liquidity) in the U.S. banking system. 

Specifically, the balance sheet is bigger than it was historically because the Fed operates an “ample” reserve system and uses administrative rates (IORB and ONRRP) to manage overnight rates. To shrink the balance sheet would mean a return to a “scarce” reserve system (i.e., shrinking the balance sheet), where the Fed will need to conduct daily “fine-tuning” of reserves through small-scale open market operations to ensure market stability. A change in the reserve system will require agreement among the Committee and may not be implemented within a short timeframe.

Some Silver Lining

Finally, just because Warsh has been wrong before doesn’t mean he’s wrong about everything now. 

In fact, we agree that the FOMC has been prone to groupthink, as Warsh has criticized. For example, during 2021, there were zero dissents at FOMC meetings when inflation was a brewing concern, as virtually every policymaker focused on fighting the last battle (not wanting to tighten too soon and derail the recovery). Warsh’s idea that the Fed “needs a more robust discussion of ideas…[and not] following the same models” may be a welcome reform for the institution.¹¹

Second, Warsh also advised that “cyclical price changes from wars and supply chains are not inflation.”¹²Indeed, one-off events often cause relative price changes but do not raise the general price level. We’ve also argued that tariffs don’t represent a material upside risk to inflation, as they represent a one-time change in prices of a small subset (<10%) of the consumer basket. 

Third, as Warsh said, perhaps the economy “could be at the front end of a productivity boom,” and the Fed’s standard theories that “economic growth is somehow going to be inflationary” may be worth revisiting.¹³ We agree—history demonstrates that 2-3% real GDP growth has coincided with sub-2% inflation in 33% of the quarters since 1993. 

The bottom line is that Trump nominated a Fed Chair who has been wrong many times, including at key moments in economic history. But a Fed Chair’s prior views and philosophies are less important than the economic circumstances and the institutional constraints they face while in office, so investors shouldn’t jump to conclusions about the conduct of monetary policy. For now, the economic circumstances—elevated labor market risks and moderating inflation—suggest continued rate cuts in the year ahead. 

We also don’t think Warsh’s nomination will threaten Fed independence, nor will he fundamentally change how the Fed operates. As a former Wall Street banker, former Fed Governor, and Washington insider, he may alter the style more than the substance at the Fed. 

We’d just take his macro views with a grain of salt.

The Payden Economics Team

Endnotes

1.  Fox Business Clips. (2025, October 24). Kevin Warsh: A new regime is needed at the Fed [Video]. YouTube. 

2.  O’Brien, M. (2017, October 23). How to be wrong about almost everything and maybe be Fed chair anyway: the Kevin Warsh story. The Washington Post. The case against Kevin Warsh for Fed Chair - The Washington Post

3.  Federal Reserve Board. (2009, April 29). Transcript of the Federal Open Market Committee meeting (FOMC).https://www.federalreserve.gov/monetarypolicy/files/FOMC20090429meeting.pdf

4.  Warsh, K. D. (2010, November 8). Risk management and the financial crisis (Speech at the Federal Reserve Bank of New York). Federal Reserve Board.https://www.federalreserve.gov/newsevents/speech/warsh20101108a.htm

5.  Bergstrand, J. (2017, November 2). Powell for Fed Chair is not as safe as the markets think [Commentary]. CNBC.https://www.cnbc.com/2017/11/02/powell-for-fed-chair-is-not-as-safe-as-the-markets-think-commentary.html

6.  Rappeport, A., & Haberman, M. (2017, November 2). Trump picks Jerome Powell to lead the Federal Reserve. The New York Times.https://www.nytimes.com/2017/11/02/business/economy/jerome-powell-federal-reserve-trump.html

7.  Ibid.

8.  Powell, J. H. (2017, June 1). Thoughts on the normalization of monetary policy (Remarks at the Economic Club of New York). Federal Reserve Board. https://www.federalreserve.gov/newsevents/speech/powell20170601a.htm 

9.  Hoover Institution. (2025, July 8). Inflation Is a Choice: Kevin Warsh on Fixing the Federal Reserve. Uncommon Knowledge with Peter Robinson. Retrieved from https://www.hoover.org/research/inflation-choice-kevin-warsh-fixing-federal-reserve.

10.  Lanman, S. (2011, February 10). Fed’s Warsh resigns; Bernanke adviser questioned stimulus. Bloomberg. https://www.bloomberg.com/news/articles/2011-02-10/fed-governor-kevin-warsh-resigns-bernanke-adviser-had-questioned-stimulus 

11.  CNBC. (2025, July 17). Former Fed Governor Kevin Warsh: We need regime change at the Fed [Video]. YouTube.

12.  Ibid.

13.  Hoover Institution. (2025, July 8).