In 2011 Kevin Warsh resigned from the governing board of the United States Federal Reserve more than six years before his term was due to end. Despite being a close ally of the central bank chairman at the time, Ben Bernanke, Warsh quit the world’s most powerful financial institution in protest against its decision to extend its quantitative easing bond-buying policies three years after the financial crisis.
Warsh is now back at the Fed as its head. The 56-year-old was confirmed this week as the successor to Jerome Powell, who President Trump lambasted as a “moron” and a “numbskull”. Powell, 73, was Trump’s first pick for Fed chairman in 2017. Warsh is his second.
Warsh is a former central banker but atypical of most senior policymakers at the institution. He is not an academic economist but a Wall Street veteran who has spent the past decade at Duquesne Family Office, the personal investment firm of the American billionaire Stanley Druckenmiller. Druckenmiller, a former hedge fund manager, is also a mentor to Scott Bessent, Trump’s Treasury secretary, who was a major backer of Warsh’s nomination after his chances looked to have faded late last year. The new Fed chairman is married to Jane Lauder, the billionaire heiress of the Estée Lauder cosmetics empire.
Warsh’s confirmation ends months of speculation over Powell’s successor at a time when the Fed’s independence from political interference has been put under the spotlight. Powell has been praised for his steadfast defiance of Trump’s public insults, but his legacy has been marred by an insistence that rising inflation in 2021 would prove “transitory”.
Jerome PowellKevin Lamarque/Reuters
As for Warsh, he inherits a mixed economy. The stock market is booming over artificial intelligence mania and employment growth continues to defy expectations. But the world’s largest economy is suffering from a fresh spike in inflation and petrol prices after the US–Iran war. The central bank has kept its benchmark interest rate at 3.5-3.75 per cent this year — down from a peak of 5.25-5.5 per cent reached at the height of the inflationary crisis in 2023.
Warsh has been an unusually outspoken critic of the Fed since he left the institution and his name was in the mix to replace Powell. His aversion to the Fed’s bond purchases is well known and shared by Bessent. Fed watchers have also been parsing through reams of his public commentary to discern what kind of chair he may prove to be. “Warsh combines a doveish view on interest rates with a hawkish approach to the Fed’s balance sheet,” Ludovic Subran, chief investment officer at Allianz, said. Here are some of his most outspoken views.
‘AI will make everything cost less’
Warsh’s most doveish position — the idea that interest rates can be kept low — derives from his view about the transformative effect of AI on the US and world economies. In the Wall Street Journal last year, Warsh said AI would “be a significant disinflationary force, increasing productivity and bolstering American competitiveness”.
He believes the technology will permanently raise efficiency of labour, leading to savings for employers, who can offer higher wages without passing on the extra costs to consumers. This should make goods and services cheaper and keep a lid on inflation. “AI is going to make everything cost less, and the US could be the big winner,” Warsh told CNBC last July.
Not all central bankers are as bullish. Janet Yellen, a former Fed chief, thinks booming tech investment in data centres and the surging stock valuations of AI firms are creating an upward pressure on prices through higher spending. “It would be dangerous for the Fed to take seriously only half the story of AI’s potential impact,” Yellen said in the New York Times. Another European central banker said Warsh’s predictions about AI making things cheap would only happen if workers lose power to bargain for higher wages and consumers start ramping up saving in fear of losing their jobs, sucking demand out of the economy.
Adopting a new inflation measure?
Like most major central banks, the Fed targets an annual inflation rate of 2 per cent. Warsh does not want to change the target but to look at alternative ways to measure inflation.
The current US consumer price index is running at a three-year high of 3.8 per cent. Inflation has accelerated as global oil prices have jumped to more than $100 a barrel since the US–Iran conflict all but stopped energy transit through the Strait of Hormuz. Warsh told US lawmakers that he would look at different measures for inflation to gauge how strong underlying price pressures were, rather than responding to shocks such as oil price jumps.
Warsh prefers “trimmed” measures of inflation — averages that remove extreme outliers on either end. These inflation metrics are produced by the central banks of Cleveland and Texas and have often run below the headline annual CPI figure. The Cleveland Fed’s trimmed metric rose by 0.43 per cent between March and April, the fastest pace since January 2024. “Warsh has been a proponent of looking more at this measure. Unfortunately it doesn’t seem to be moving in the doveish direction he expected,” Jim Reid at Deutsche Bank said.
A smaller Fed
Warsh’s career as a central banker is “best understood not as a fixed hawk or dove, but as a consistent critic of the expanded size and role of the Fed”, Jon Butcher, senior US economist at Aberdeen, an asset manager, says.
Warsh wants to cut down the size of the Fed’s balance sheet by selling off hundreds of billions of government bonds bought during the quantitative easing era and narrow the Fed’s regulatory powers over the financial system.
On the balance sheet, he is likely to work with Bessent to shrink the current figure of $6.7 trillion, a process that the Bank of England has carried out since 2023 called quantitative tightening.
Warsh thinks bond buying should be reserved for economic emergencies and had gone on too long after the financial crisis and the pandemic. “Money on Wall Street is too easy, and credit on Main Street is too tight. The Fed’s bloated balance sheet, designed to support the biggest firms in a bygone crisis era, can be reduced significantly,” he said in the WSJ.
There are risks in moving to a smaller balance sheet. The Fed selling bonds could “spark unacceptable upward pressure” on market interest rates, according to Fitch, a ratings agency.