The long-awaited nomination of Kevin Warsh as the next Chair of the Federal Reserve is now behind us, and the market response was notably calm. For an announcement with this level of anticipation and magnitude, the absence of meaningful volatility was telling. Markets appear to view Warsh as a credible, institutionally grounded choice rather than a disruptive one. That reaction matters, particularly given the broader uncertainty surrounding the future composition and direction of the Fed.
Our focus now shifts to what comes next. Over the coming months, Warsh will move through the confirmation process and, if successful, become the new Fed Chair. As of today, he holds the President’s nomination, formally initiating Senate review. This marks only the beginning of the path to the chair. There are multiple steps ahead, and the process is likely to include a few additional steps that will need careful navigation.
Let’s break it down.
The most significant near-term milestone will be Warsh’s appearance before the Senate Banking Committee, where he will lay out his priorities and face close questioning on his credibility, inflation, regulation, and—critically—his views on Federal Reserve independence.
From a policy perspective, Warsh’s broader framework is most clearly articulated in a November 2025 Wall Street Journal opinion piece, in which he argues that the Fed has become captive to what Milton Friedman described as the “tyranny of the status quo.” His core arguments reinforce the signals embedded in his nomination:
- AI is a meaningful, structural disinflationary force that can lift productivity, real wages, and long-term growth.
- Inflation is ultimately a policy choice driven by fiscal excess and monetary accommodation, not by strong growth or rising wages.
- The Fed’s bloated balance sheet and regulatory posture have favored Wall Street over Main Street, constraining credit formation and contributing to inflationary pressures.
- U.S. regulatory policy should prioritize domestic competitiveness over global convergence, particularly with respect to Basel standards.
In practice, however, the scope for immediate action is constrained. Quantitative tightening was halted as recently as December of last year, while the Federal Open Market Committee remains acutely sensitive to steps that could reintroduce liquidity stress. In our opinion, a return to a pre-2008 corridor-style balance sheet is therefore unlikely. Near-term policy adjustments are far more likely to occur through interest rates than through renewed balance-sheet contraction.
These constraints heighten the importance of Warsh’s current inflation views. Historically, he was known as hawkish, particularly during his tenure as a Fed Governor from 2006 to 2011. More recently, he has emphasized productivity-led disinflation and supported lower policy rates, broadly aligned with the administration’s preferences. Whether this reflects a durable evolution or a tactical shift remains an open question. The more likely outcome is a gradual, incremental adjustment rather than a sharp regime change, with the Fed retaining a backstop role only during periods of genuine systemic stress.
Warsh’s credibility rests not only on ideas but on experience. He served on the Board during the global financial crisis and supported the initial deployment of quantitative easing, before later becoming concerned about the prolonged reliance on balance-sheet tools and their market-distorting effects. His departure from the Board reflected those concerns, and that experience continues to shape his approach today.
He has also been consistently critical of the Fed’s regulatory posture, arguing that post-crisis frameworks and global standards have constrained bank lending—particularly for small and mid-sized institutions—and have drifted away from the Fed’s core mission.
Bottom line: From our perspective, Warsh’s views do not signal a radical break from the current framework. Rather, he represents a disciplined effort to rebalance policy transmission toward productivity, rate policy, and market signals, while limiting reliance on balance sheet tools. We do not view his policy perspective as a source of concern for the Senate Banking Committee.
With that being said, Warsh must secure a majority vote to win the seat. This poses the immediate question: who are Warsh’s allies, and where does additional work need to be done to secure support?
Senator Thom Tillis sits at the top of the watch list, not because of opposition to Warsh specifically. Tillis has openly shared concerns about the Department of Justice investigation involving Chair Jerome Powell and the decision to pause consideration of new Federal Reserve seats until that issue is resolved. It is important to caveat that this stance was not directed at Warsh specifically. If anything, it creates room for alignment: Tillis and Warsh appear to share a strong commitment to preserving Federal Reserve independence, a common principle that could ultimately land favorably when Warsh presents to the Senate Banking Committee. At the end of the day, we do not anticipate Tillis blocking Warsh’s confirmation.
Assuming Warsh wins the Senate Banking Committee vote, the question remains which seat is available to fill and whether the timing ultimately works in his favor. There could be two seats in play. If the investigation involving Jerome Powell does not reach a conclusion before the final confirmation vote, Powell may remain in his seat, at least temporarily. In that case, only one seat would be immediately available. Governor Miran’s term officially ended on January 31, 2026, making that seat the most viable near-term option. On a constructive note, Miran recently stated in a letter to the President, “While I took an unpaid leave of absence from the Council to come to the Federal Reserve, I promised the Senate that if I should stay on the Board past January, I would formally depart the Council.” We think it’s safe to say that Warsh will have a place to sit in the interim.
In tandem with Warsh’s trek to confirmation, it is also important to frame our outlook for markets during this period. Given that the nomination occurred without significant volatility, we believe much of the market response to a new Fed Chair has already been priced in. As a result, we do not expect large volatility fluctuations tied specifically to the confirmation process.
Once Warsh secures the majority vote from the Senate Banking Committee and is confirmed as the new Fed Chair, the game officially begins.
From day one as Fed Chair, the clock would be ticking. Warsh has made ambitious, well-intentioned commitments to reducing the Fed’s balance sheet. Delivering those commitments would be a significant undertaking, requiring consensus within the committee and—most critically—time, which is not on his side. As a result, Warsh would likely face an uphill battle in materially shrinking the Fed’s balance sheet.
To gain traction on this initiative, Warsh would likely find some support from Governor Bowman. However, given the FOMC’s recent decision to end quantitative tightening (QT) and engage in reserve management purchases (RMPs), a pivot back toward balance sheet reduction as early as May would represent a significant shift in policy direction.
If Warsh is able to build committee consensus around his approach to running the Fed, the Fed’s balance sheet could evolve along the lines outlined below:
As Warsh noted in July of last year: “We need a new Treasury-Fed accord, as we did in 1951 after another period where we built up our nation’s debt, and we were stuck with a central bank that was working at cross purposes with the Treasury. That’s the state of things now.” “So, if we have a new accord, then the Fed chair and the Treasury secretary can describe to markets plainly and with deliberation, ‘This is our objective for the size of the Fed’s balance sheet.’”
Warsh has argued that lower front-end rates should be paired with a smaller Fed balance sheet to achieve a neutral shift in financial conditions. Lower front-end rates are the more straightforward component of that objective. Reducing the balance sheet, however, would require coordination with the Treasury.
Currently, the Fed’s Treasury holdings have a weighted-average maturity of 8.4 years, compared with 5.8 years for the outstanding universe of U.S. debt. Securities with maturities of less than one year account for 17% of the Fed’s holdings, versus approximately 22% of the outstanding debt universe. At the long end, 37% of the Fed’s Treasury holdings—roughly $1.56 trillion in notional—have maturities greater than 10 years.
While this maturity mismatch creates room for the Treasury to continue relying on front-end issuance as the Fed increases its bill holdings, an outright reduction of the balance sheet through traditional quantitative tightening (QT) runoff would be slow and misaligned with the pace of rate cuts a Warsh-led Fed would likely pursue. To achieve a financial conditions-neutral deleveraging of the Fed’s balance sheet alongside easing front-end rates, coordination with the Treasury would be necessary.
Uncoincidentally and to Warsh’s advantage, Scott Bessent, US Secretary of the Treasury, shares many of the same views as Warsh: reduced regulatory oversight for banks, more restrictive balance sheet policies, and tighter coordination between the Fed and Treasury. In addition, Warsh and Bessent have a distinct connection; they both have worked under famed macro investor Stanley Druckenmiller (though at separate times). Bessent worked with Druckenmiller at Soros Fund Management from 1991 to 2000. Warsh joined the Duquesne Family Office as a partner and advisor after leaving his post at the Fed in 2011, working closely and co-authoring WSJ opinion pieces together.
According to Druckenmiller: “To have this kind of competence at the Treasury and this kind of competence in the Fed is something I haven’t seen in a pair in decades, maybe [since] Rubin and Greenspan,” Druckenmiller told Barron’s. “I know they’re gonna work together. And they both have market experience. They both have big brains. Kevin is a great communicator. Scott has become a much better communicator. I’m hopeful, and I had no hope before these two were paired together. Even though I was the boss of each of them at one point, they both got IQ points on me.”
Assuming Warsh can build consensus around his views, a Warsh-led Federal Reserve and a Bessent-led Treasury could work together to advance their shared objectives. This partnership could take the form of a Treasury–Fed asset swap, in which the Treasury issues a significant volume of short-term Treasury bills and exchanges them for longer-duration assets on the Fed’s balance sheet, such as Treasuries or mortgage-backed securities (MBS). If an all-Treasury balance sheet is preferred, the MBS holdings could also be swapped. While this approach could move the balance sheet in the desired direction, it would still take time and is unlikely to enable a rapid reduction of the full $2 trillion in mortgage holdings.
This relationship could advance several objectives for both the Federal Reserve and the U.S. Treasury:
- Better align the weighted-average maturity of the Fed’s balance sheet with the maturity profile of outstanding U.S. debt.
- Shift more of the maturity burden to the front end, allowing the Fed to accelerate balance-sheet reduction with less risk of long-duration rate volatility.
- A smaller, more focused balance sheet would give the Fed greater flexibility to lower front-end rates without materially easing overall financial conditions.
- Reduce the Fed’s footprint and distortion in private markets.
- Allow the Treasury to retain greater control over long-duration issuance, supporting more active and deliberate debt-management decisions.
If executed properly, coordination between the Fed and the Treasury could allow both institutions to operate independently while preserving their respective mandates. The Fed would continue to pursue an independent monetary policy through the rate mechanism and active reserve management. The Treasury would maintain independence over fiscal policy, including debt issuance and maturity management, as well as tax policy and deregulation. In this framework, both institutions advance their objectives without compromising independence—a win for both parties.
One significant consideration is that any asset swap removing long-duration assets from the Fed’s balance sheet would realize mark-to-market losses. Unrealized losses totaled roughly $1 trillion as of the end of 2024. This would increase the Fed’s deferred asset—a negative liability that represents the cumulative profits the Fed must earn before remittances to the Treasury can resume.
That said, once the swap is complete, the Fed would hold a balance sheet concentrated in short-duration Treasury bills. These assets generate more stable, predictable interest income and absent duration-driven valuation losses could allow the Fed to return to positive earnings more quickly and amortize the deferred asset faster than under the current structure, allowing earnings on the balance sheet to be remitted to the Treasury.
That outcome, however, hinges on a major assumption. A reform of this magnitude would almost certainly face skepticism, and concerns over Fed independence would likely reemerge, at least initially. The burden would fall on Warsh’s communication strategy to convince markets that operating under this new framework would preserve independence from political pressure while serving the broader economic interest.
A separate risk is that Warsh, like any Fed Chair, will need to remain insulated from political pressure. Trump has already made comments—though not explicitly directed at Warsh—that indicate limited patience with the Fed. As noted by Financial Times economics editor Chris Giles, President Trump could ultimately lose patience and redirect his frustration toward Warsh, accusing him of having promised to be something he ultimately is not. Giles argues this is already Trump’s central fear and a plausible scenario. Such an outcome would be damaging for the Federal Reserve, and a prolonged political confrontation would likely undermine sound economic management.
To summarize our perspective, Warsh appears to have the experience, commitment to Federal Reserve independence, and willingness to work constructively with the Treasury needed to navigate these risks, should they emerge. While he would not be immune to heightened scrutiny, we believe he is capable of managing it in a manner that ultimately supports the credibility and effectiveness of the Federal Reserve.
The proposed Treasury-Fed accord is not necessarily an expectation of how policy will evolve, but an exercise in understanding the goals of the incoming Fed chair and how they could tangibly be achieved.
Markets will likely be focused on the extent that Warsh sees additional policy easing, but the key question lies in how the Fed’s framework evolves, and how quickly those changes are reflected in rates, regulation, and risk pricing. Warsh would enter the role with an ambitious agenda, differentiated views, and a policy framework that challenges the Fed’s current standards of practice.
Time will ultimately determine how this plays out. If and when Warsh is confirmed and begins his term as Fed Chair, he will face a substantial agenda and limited time to execute it. That said, his experience, posture, and stated commitment to Federal Reserve independence suggest a constructive shift in direction, even if progress unfolds unevenly.
Let’s Talk.
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