The Big Idea
Quick thoughts on Kevin Warsh as Fed Chair
This material is a Marketing Communication and does not constitute Independent Investment Research.
President Trump announced Friday his choice of Kevin Warsh as his nominee for Chair of the Federal Reserve Board when Jay Powell’s term expires in May. Although Warsh has said he believes policy rates should be lower, he has a hawkish track record from his earlier term as a Fed governor. Warsh would also like to see the Fed shrink its balance sheet. Perhaps most importantly, he looks likely to stand up for the Fed and maintain its independence.
For what it’s worth, Warsh was both my preference and my expectation from the moment that the rather drawn-out process began. To go back a bit, Powell and Warsh were reportedly the two finalists in 2017, the first time that Trump picked a new Fed Chair. At that time, the narrative was that Trump picked Powell over Warsh because he felt that Powell would be more dovish. Powell was viewed as being largely supportive of the extremely dovish tendencies of his predecessor, Janet Yellen, but with an ideological bent that was closer to Trump’s than Yellen’s. Ironically, less than year after Powell was in place as chair, Trump began to criticize Powell and the Fed for not cutting rates aggressively enough. In fact, Trump told Warsh in 2020 that he wished that he had picked him rather than Powell. That criticism of Powell only intensified in 2025 when Trump took office for a second term.
All four of the finalists for the Fed Chair job told Trump that the Fed’s policy rate should be lower. Having said that, as alluded to above, Warsh’s track record when he was a Fed Governor from 2006 to 2011 was perceived as relatively hawkish. He warned about inflation risks in 2008, in the months before the Financial Crisis mushroomed, and he worried in 2009 and 2010 that inflation would surge due to the Fed’s still extremely easy policy stance. Warsh vehemently opposed the FOMC’s decision in late 2010 to engage in a second round of QE at a time when the emergency of the Financial Crisis was long past. He resigned from the Board a few months later. So, Warsh may seem an odd choice for a President who is adamant that the Fed should be running a far easier monetary policy stance.
The argument that Warsh has made publicly is that the Fed can lower rates but should do so to rebalance policy rather than make it sharply easier. Warsh would like to see the Fed shrink the size of its balance sheet dramatically, arguing that the excess liquidity that the Fed provides with such a large balance sheet mainly benefits Wall Street. He would like to see a far smaller balance sheet and believes that this would allow the Fed to operate with a lower policy rate (which, he says, would mainly benefit Main Street).
I am curious about how Warsh would pursue a smaller balance sheet. It is easy enough to say that the Fed should sell off part of its securities portfolio, but there would need to be an offsetting decline on the liability side of the Fed’s accounting ledger. Unless the Fed eliminates some of the other programs that it offers, for example the reverse RP program open to foreign official and international accounts (which currently amounts to over $300 billion) or taking deposits from GSEs and financial utilities, among others (a line item that exceeds $200 billion), it would seem that a smaller balance sheet necessarily means a lower level of bank reserves. There may be an alternative regulatory arrangement that would leave banks with lower demand for bank reserves, but, for now, the Fed’s operating framework is to supply reserves to match the demand from the financial system. So, unless the Fed changes its operating framework or banks dramatically lower their demand for reserves, the smaller balance sheet half of Warsh’s vision could be difficult to execute.
On policy rates, we can start with the assumption that anyone Trump nominated was going to take a relatively dovish stance, though it is worth pointing out that, notwithstanding Trump’s complaints, the man Warsh is replacing has been consistently one of the more dovish Fed officials during his tenure as Chair. It is difficult to say whether Warsh is more or less dovish than, say, Rick Rieder.
What I viewed as most important throughout this process was whether the new Fed Chair will preserve the Fed’s independence, fighting the administration if necessary to do the right thing for the economy. As I have frequently stated, I was less worried about the Fed losing its independence than most financial market participants throughout this process, even if Kevin Hassett had been chosen. That being said, I have the utmost confidence that Kevin Warsh will stand up for the Fed as an institution and work hard to maintain its independence. I also have confidence that if the economic data suggest that the Fed should stand pat rather than cutting or even, at some point further ahead in President Trump’s term, the data dictate hiking rates, Warsh will push for what the economy needs, not what the president wants.
At the margin, Warsh’s selection makes me feel ever so slightly more comfortable with my call that the FOMC will hold rates steady throughout 2026, though I was prepared to hold that view regardless of who Trump picked. Warsh’s track record from his previous stint on the Fed board may not be definitive, as he could certainly have changed his perspective in 15 years, but it is also not irrelevant. Also, if Warsh comes to the view that shrinking the balance sheet is not so easy to do or a sufficiently popular view within the FOMC to execute, then his dovishness on rates could quickly fall by the wayside. That, of course, remains to be seen.
In any case, the reason that I believe Warsh is getting the job is not his views on monetary policy but rather his advocacy for reform at the Fed. Warsh has for years argued that the Federal Reserve system needed dramatic reform. He has talked about the Fed engaging in mission creep, including a high-profile speech last April to the G30 and IMF. He argued that the Fed’s purchases of trillions of dollars’ worth of Treasuries over the years has aided and abetted the federal government’s profligate budget trajectory. He criticized the change in the monetary policy framework in 2020 which, in his view, contributed to the inflation surge that followed after the pandemic. In his view, the emphasis on hitting “maximum employment” as a “broad-based and inclusive goal” was a left-leaning ideological determination that distracted from the Fed’s statutory responsibilities. This emphasis on “inclusiveness” was also a major point of emphasis internally under both Chair Yellen and Chair Powell. Finally, Warsh noted that the Fed aggressively waded into the climate change debate, a place where he said it had no business (to be fair, Powell began to reverse that emphasis over the past year or so). In my view, these are all legitimate critiques, and I would applaud efforts by Warsh to redirect the Fed’s focus back to its main job, delivering price stability and maximum sustainable employment for the U.S. economy. Reforming the institution along these lines would presumably have a far more persistent and important impact on the Fed and on the economy over time than the direction that Warsh leans in the policy debate at his first few FOMC meetings. Trump’s selection of Warsh in my view reflects that, for all of his insistence that rates should be lower, Trump understands that institutional reform would deliver a far more impactful legacy.
This material is intended only for institutional investors and does not carry all of the independence and disclosure standards of retail debt research reports. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This message, including any attachments or links contained herein, is subject to important disclaimers, conditions, and disclosures regarding Electronic Communications, which you can find at https://portfolio-strategy.apsec.com/sancap-disclaimers-and-disclosures.
Important Disclaimers
Copyright © 2026 Santander US Capital Markets LLC and its affiliates (“SCM”). All rights reserved. SCM is a member of FINRA and SIPC. This material is intended for limited distribution to institutions only and is not publicly available. Any unauthorized use or disclosure is prohibited.
In making this material available, SCM (i) is not providing any advice to the recipient, including, without limitation, any advice as to investment, legal, accounting, tax and financial matters, (ii) is not acting as an advisor or fiduciary in respect of the recipient, (iii) is not making any predictions or projections and (iv) intends that any recipient to which SCM has provided this material is an “institutional investor” (as defined under applicable law and regulation, including FINRA Rule 4512 and that this material will not be disseminated, in whole or part, to any third party by the recipient.
The author of this material is an economist, desk strategist or trader. In the preparation of this material, the author may have consulted or otherwise discussed the matters referenced herein with one or more of SCM’s trading desks, any of which may have accumulated or otherwise taken a position, long or short, in any of the financial instruments discussed in or related to this material. Further, SCM or any of its affiliates may act as a market maker or principal dealer and may have proprietary interests that differ or conflict with the recipient hereof, in connection with any financial instrument discussed in or related to this material.
This material (i) has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments or other financial instruments, (ii) is neither research, a “research report” as commonly understood under the securities laws and regulations promulgated thereunder nor the product of a research department, (iii) or parts thereof may have been obtained from various sources, the reliability of which has not been verified and cannot be guaranteed by SCM, (iv) should not be reproduced or disclosed to any other person, without SCM’s prior consent and (v) is not intended for distribution in any jurisdiction in which its distribution would be prohibited.
In connection with this material, SCM (i) makes no representation or warranties as to the appropriateness or reliance for use in any transaction or as to the permissibility or legality of any financial instrument in any jurisdiction, (ii) believes the information in this material to be reliable, has not independently verified such information and makes no representation, express or implied, with regard to the accuracy or completeness of such information, (iii) accepts no responsibility or liability as to any reliance placed, or investment decision made, on the basis of such information by the recipient and (iv) does not undertake, and disclaims any duty to undertake, to update or to revise the information contained in this material.
Unless otherwise stated, the views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the author, as of the date of publication of this material, and are subject to change without notice. The recipient of this material should make an independent evaluation of this information and make such other investigations as the recipient considers necessary (including obtaining independent financial advice), before transacting in any financial market or instrument discussed in or related to this material.
Important disclaimers for clients in the EU and UK
This publication has been prepared by Trading Desk Strategists within the Sales and Trading functions of Santander US Capital Markets LLC (“SanCap”), the US registered broker-dealer of Santander Corporate & Investment Banking. This communication is distributed in the EEA by Banco Santander S.A., a credit institution registered in Spain and authorised and regulated by the Bank of Spain and the CNMV. Any EEA recipient of this communication that would like to affect any transaction in any security or issuer discussed herein should do so with Banco Santander S.A. or any of its affiliates (together “Santander”). This communication has been distributed in the UK by Banco Santander, S.A.’s London branch, authorised by the Bank of Spain and subject to regulatory oversight on certain matters by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The publication is intended for exclusive use for Professional Clients and Eligible Counterparties as defined by MiFID II and is not intended for use by retail customers or for any persons or entities in any jurisdictions or country where such distribution or use would be contrary to local law or regulation.
This material is not a product of Santander´s Research Team and does not constitute independent investment research. This is a marketing communication and may contain ¨investment recommendations¨ as defined by the Market Abuse Regulation 596/2014 ("MAR"). This publication has not been prepared in accordance with legal requirements designed to promote the independence of research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. The author, date and time of the production of this publication are as indicated herein.
This publication does not constitute investment advice and may not be relied upon to form an investment decision, nor should it be construed as any offer to sell or issue or invitation to purchase, acquire or subscribe for any instruments referred herein. The publication has been prepared in good faith and based on information Santander considers reliable as of the date of publication, but Santander does not guarantee or represent, express or implied, that such information is accurate or complete. All estimates, forecasts and opinions are current as at the date of this publication and are subject to change without notice. Unless otherwise indicated, Santander does not intend to update this publication. The views and commentary in this publication may not be objective or independent of the interests of the Trading and Sales functions of Santander, who may be active participants in the markets, investments or strategies referred to herein and/or may receive compensation from investment banking and non-investment banking services from entities mentioned herein. Santander may trade as principal, make a market or hold positions in instruments (or related derivatives) and/or hold financial interest in entities discussed herein. Santander may provide market commentary or trading strategies to other clients or engage in transactions which may differ from views expressed herein. Santander may have acted upon the contents of this publication prior to you having received it.
This publication is intended for the exclusive use of the recipient and must not be reproduced, redistributed or transmitted, in whole or in part, without Santander’s consent. The recipient agrees to keep confidential at all times information contained herein.
