Trump's Pick, Powell, Vows to Change Course at Fed: How Will Monetary Policy Shift?

Original Title: "Fed's Next Chairman Unpredictable! Warsh's Policy Proposal: Rate Cut + Balance Sheet Contraction"

Original Author: Bao Yilong, Wall Street News

Rhythm BlockBeats Note: This article was first published on December 16, 2025. On January 30, Trump officially announced that he would nominate experienced economist and former Fed governor Kevin Warsh as the Fed chairman.

It is worth noting that Kevin Warsh's father-in-law is Ronald Lauder, the current head of Estee Lauder Group, and a long-time close friend of Trump, which has also attracted attention due to this personal relationship. The following is the original content:

According to Deutsche Bank's analysis, if Warsh is elected as Fed chairman, his policy proposal may present a unique combination of "rate cut and balance sheet contraction concurrently."

On December 16, Wall Street News mentioned that during a media interview, US President Trump stated that former Fed governor Kevin Warsh, alongside Kevin Hassett, had emerged as a leading candidate in the Fed chairman candidate list. He said:

"I think both these Kevins are great."

Trump's statement above led to a significant drop in Hassett's odds in the prediction market Kalshi. As of Tuesday, Polymarket data showed that the prediction market believed Warsh had a greater probability than Hassett of becoming the next Fed chairman.

On December 15, in a breaking news report, Windseeker Trading Station reported that Matthew Luzzetti's team at Deutsche Bank published a research report, providing an in-depth analysis of Warsh's policy proposal. The report analyzed that if Warsh were to be elected, he would support a rate cut but would also require a reduction in the balance sheet.

The report pointed out that the premise of "rate cut and balance sheet contraction concurrently" is in doubt in the short term due to regulatory reforms to reduce banks' reserve requirements.

Deutsche Bank believes that the market needs to closely monitor whether the new chairman can maintain independence under Trump's pressure for a significant rate cut, and the process of establishing his policy credibility.

Warsh's Resume

Unlike Ph.D. economist Hassett, Warsh has a legal background and extensive experience in both the public and private sectors.

In the public sector, he served as a Fed governor from 2006 to 2011, a period coinciding with the Fed's response to the global financial crisis, during which he played a crucial intermediary role between the Fed and the market.

He has been highly critical of the Federal Reserve's aggressive balance sheet operations over the past 15 years, believing that the quantitative easing policy has deviated from the central bank's core mandate.

Currently, Warsh serves as a partner at the Stan Druckenmiller family office Duquesne, as well as a distinguished visiting fellow at the Hoover Institution and lecturer at the Stanford Graduate School of Business.

This experience spanning academia, regulatory bodies, and the investment community has provided him with a profound understanding of both financial markets and monetary policy.

Warsh's Stance on QE

According to Deutsche Bank, in recent years Warsh has levied a significant amount of criticism against the Federal Reserve, encompassing both short-term policy decisions and long-term strategic considerations.

First and foremost, Warsh has consistently criticized the Fed's aggressive use of the balance sheet over the past fifteen years.

While he supported the Fed's quantitative easing (QE) program in response to the global financial crisis, he warned that further subsequent QE was not appropriate. It could lead to inflation and financial stability risks, causing the Fed to stray from its core mandate, intervening in credit allocation policies that could distort market signals.

The report cites a recent statement by Warsh:

During the summer and fall of 2010, at a time of robust economic growth and financial stability, I was deeply concerned that the decision to purchase more treasuries would embroil the Fed in the complex political business of fiscal policy. With QE2, I dissented and resigned shortly thereafter.

Warsh further believes that the Fed's active use of the balance sheet may have ushered in a "currency-led" era. By artificially suppressing rates for an extended period, he thinks the Fed has played a leading role in facilitating the accumulation of US government debt.

Warsh's Critique of Other Policies

In addition to the balance sheet, Warsh has also critiqued various aspects of the Federal Reserve.

For example, he believes the Fed relies too heavily on data and lacks forward-looking perspectives, while criticizing the Fed's routine use of forward guidance. He recently stated:

Forward guidance, a tool that was prominently introduced during the financial crisis, has little use in normal times.

Warsh has also questioned other aspects of how the Fed formulates and communicates monetary policy, including mistakenly believing that "monetary policy is unrelated to money," "black box DSGE models are grounded in reality," and "Putin and the pandemic should be blamed for inflation, not government spending and money printing."

The report's analysis suggests that these criticisms imply Warsh wishes to place greater emphasis on the Fed's balance sheet size and money supply in executing monetary policy and may call for a comprehensive overhaul of the Fed's research team.

Finally, while he described the Fed's independence as a "valuable" endeavor, he also believed that the Fed itself had invited scrutiny of its independence. Warsh pointed out:

The Fed's outsized role and underperformance have weakened the key and valuable rationale for monetary policy independence.

Additionally, Warsh criticized the Fed's mission creep, including considerations of issues such as climate and inclusivity.

Recent Policy Impact Outlook

Although Warsh has recently advocated for lower interest rates, Deutsche Bank believes he is not structurally a dove.

His views during his tenure as a Governor amid the global financial crisis were sometimes more hawkish than his colleagues, especially on balance sheet issues. And recently, he has signaled non-support for the Fed's decision to cut rates by 50 basis points in September last year.

In terms of policy decisions, Warsh's recent comments suggest he may support lowering the policy rate; however, this move may come at the cost of shrinking the bank's balance sheet.

Nevertheless, given that reserves are at comfortable levels and the Fed recently restarted its asset purchase program, such a trade-off would only be feasible under regulatory reforms reducing bank reserve requirements.

Although several Fed officials, including Vice Chair Bowman and Governor Wallin, have recently made this argument, the feasibility of these changes in the short term is unclear.

Finally, the research report analyzes that from a more macro perspective, regardless of who President Trump chooses, the market may test the independence of the next Fed chair and his credibility in achieving the inflation target commitment.

Deutsche Bank emphasizes that a new chair always needs to earn this trust. Given Trump's call for a significant rate cut by the Fed, this requirement may be more urgent.

Therefore, Deutsche Bank is skeptical about whether there will be substantial policy changes after the June Fed leadership transition, especially with a new chair having only one vote in a particularly divided committee.

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