Written by Conor Bambery
Introduction
With current Federal Reserve (Fed) chair Jerome Powell’s term set to end on May 15, 2026, President Trump announced Powell’s successor, Kevin Warsh, on January 30th (Bayly, 2026). Throughout Trump’s second term, he has openly voiced his disagreement with the (politically independent) Fed and with Powell himself. With the nomination of Kevin Warsh, has Trump succeeded in gaining control over U.S monetary policy, or will the central bank hold its ground? And with that, what should be expected from monetary policy in 2026, and how might the markets react?
Kevin Warsh: An Overview
Warsh’s nomination to Chairman of the Fed serves as the latest bullet point to an already star-studded resume. Warsh graduated from Stanford with a BA in public policy in 1992, graduated cum laude from Harvard Law with a J.D. in 1995, and then proceeded to work in investment banking at Morgan Stanley from 1995 to 2002, where he made his way up to executive director (Board of Governors of the Federal Reserve System, 2025). In 2002, President Bush appointed Warsh as the special assistant to the president for economic policy, as well as the executive secretary for the National Economic Council. Then, in 2006, President Bush nominated Warsh to fill a vacancy in the Federal Reserve Board. At 35 years old, Warsh became the youngest person to ever serve on the Fed board (Chavez-Dreyfuss, 2026). Warsh played a key role in mitigating the damage during the 2008 financial crisis by helping the Fed engineer bailouts of failing financial institutions, including his former employer, Morgan Stanley (Morgenson, 2011). With his Wall Street background, he became known in the Fed as the financial market “whisperer” (Chavez-Dreyfuss, 2026). Since his role on the Fed board ended in 2011, he has served on the boards of directors of UPS and Coupang, Inc., and has also become a lecturer at the Stanford Graduate School of Business.
Policy Philosophy
During his 5 years on the board, Warsh was known for being extremely cautious of inflation (Schonberger, 2026). Even if he never dissented against a rate cut (Barber, 2026), he would often voice his concerns over inflationary risks. However, this time may be different. Warsh believes that the Artificial Intelligence (AI) boom is “the most productivity-enhancing wave of our lifetimes – past, present, and future” (Pollard et al., 2026). For context, it is believed that the widespread use of AI across firms could lower prices by reducing labor costs and increasing productivity, allowing firms to increase supply. Of course, President Trump has been adamant that the Fed should slash rates and add “rocket fuel” to the economy (Breuninger and Cox, 2025). In moderation, rate cuts could be a useful tool to support steady growth, but Trump’s suggested 2-3 percentage point cut (Reuters Staff, 2025) would likely cause the economy to overheat and inflation to spike. Warsh should hopefully provide a voice of moderation, allowing for steady growth without flying too close to the sun.
The Fed’s Toolkit
On December 1st, 2025, the Fed announced the end of its 3-year quantitative tightening program (Johnson et al., 2025). This was a method to reduce the size of the Fed’s balance sheet by allowing bonds to mature without reinvesting the proceeds, essentially “deleting” money from the economy to ease inflation. Warsh, however, has had a long-standing view that the Fed should shrink its balance sheet (WSJ Staff, 2025), which could point to a return of quantitative tightening. It likely would help mitigate inflationary risk, but quantitative tightening could also present a liquidity risk to the economy and put upward pressure on the treasury yield curve when the Fed’s balance sheet reductions remove enough money from the banking system that markets malfunction during stress. This prevents banks and investors from trading investments even if they wanted to.
The Impact of the Treasury Yield Curve
The Treasury Yield Curve is a graph that plots the rate of return on Treasury bonds (essentially the “risk-free rate”) on the Y-axis by maturity date, from earliest to latest, on the X-axis. If Warsh decides to re-implement quantitative tightening, it would mean the Fed (one of the largest buyers of treasury securities) would stop buying new ones. Thus, demand for these bonds declines, prices fall, and their yield, or rate of return, rises, making the yield curve steeper. This is because the Fed Funds Rate only directly controls short-term borrowing, not long-term yields. A steeper yield curve has many implications, few of which are good things for the stock market. For starters, larger bond yields make the stock market less attractive to investors. Combined with the fact that a higher risk-free rate decreases stock valuations as the opportunity cost rises, there could be a visible drop in stock-based portfolios. Moreover, as long-term loans (mortgages, student loans, auto loans, etc.) are tied to Treasury bonds, borrowing could become more expensive for individuals and firms, slowing growth. To put the cherry on top, already volatile tech stocks could see an even larger decrease in valuations as a lot of their value relies on distant earnings, and a higher risk-free rate makes those future cash flows much less valuable. As the S&P 500 is already disproportionately tech-heavy (Bary, 2024), this could cause problems for S&P ETFs that anchor many investor portfolios.
Tying it All Together
There is no doubt that Kevin Warsh has his work cut out for him. With the implementation of AI, rising political tensions, and an exponentially widening wealth gap, our economy is entering uncharted waters, and Warsh is the one picked to steer the ship. Cutting rates lowers short-term borrowing costs, boosts consumer spending and confidence, but adds the risk of inflation. Quantitative tightening decreases the risk of inflation, but increases long-term borrowing costs and decreases stock valuations. It should be noted, for anyone looking to rebalance their portfolio, that inventory-intensive industries, such as manufacturing or retail, as well as financial institutions, typically do well when short-term borrowing is cheaper. Furthermore, capital-intensive industries such as real estate development, utilities, and energy typically do worse when long-term borrowing is more expensive. The combination of both also creates unpredictable market conditions, as mixed signals confuse consumers and make it hard for banks to accurately price risk. Used correctly, the right combination of the two could provide steady growth to the economy and reduce risk, but used incorrectly, the economy could enter a unpredictable spiral. It will be up to Warsh to find the correct mix and resist pressure from the president while doing so.
References
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