Warsh 'regime change' faces steep hurdles

Kevin Warsh checks a long list of boxes for President Donald Trump as his pick to run the Federal Reserve, with longstanding political and social ties to the president, deep Wall Street connections and a well-tailored demeanor, but how deeply and quickly he will cut interest rates and how aggressively he will pursue his "regime change" at the Fed remain open questions.

Trump has called for rate cuts to what amount to crisis levels of perhaps 1%. That's an aim Warsh, an inflation hawk in his prior term as a Fed governor from 2006 to 2011, may find too aggressive, and which economic data and the views of his 18 policymaking colleagues may make impossible. Rate futures remained priced for just two quarter-point rate cuts in 2026 from the current 3.50% to 3.75% range, and did not move appreciably after Trump announced the nomination in a social media post.

Likewise, Warsh's years of Fed criticism, begun after he left the board in 2011 and intensified over the past year as Trump considered him to succeed current Chair Jerome Powell, now meet the challenge of how to turn think-tank speeches and newspaper op-eds into reform that can get through the Fed's Board of Governors, get sign-off from Trump and Treasury Secretary Scott Bessent, and clear the US Congress if it involves amending the Federal Reserve Act.

Change, in other words, may be easier said than done.

Warsh "is a pragmatist who won't want to lose market trust by making cuts that aren't warranted. His long history of concern about inflation suggests that he won't allow the economy to overheat," said Heather Long, Chief Economist for Navy Federal Credit Union. "He's been an outspoken critic of the Fed's balance sheet and groupthink. More clarity is needed on how far he intends to go" in pursuing other changes at the Fed.

Warsh "appears to be predisposed to make more fundamental changes...particularly in the way the committee approaches forward guidance, relying too much on near-term forecasting and increased data-dependence," analysts with TD Securities wrote in an analysis of Warsh's nomination.

Warsh's criticism of Fed modeling and forecasting in fact could provide an early test of his intentions. At his last press conference, Powell issued a challenge for the next chair: "If it's a question of using better models, bring them on. Where are they? We'll take them."

The Fed's large balance sheet has been a particular focus for Warsh. He opposed some of the "quantitative easing" conducted while he was at the Fed, supporting Chair Ben Bernanke in public votes but eventually resigning partly in protest.

He may find his hands tied there as well.

The balance sheet is now intimately interwoven with the Fed's control of interest rates, and provides liquidity for banks and dollars for the world. Unless that changes, it can only shrink so far.