Original Author: Zhang Yaqi
Original Source: Wall Street Journal
Warsh is about to face the long-awaited Federal Reserve chairman hearing. This moment is undercurrent: he must show a submissive attitude to Trump, but also hold the central bank's bottom line under inflationary pressure. A slight deviation may make him the next scapegoat for the White House's accountability.
The Senate Banking Committee is scheduled to hold a confirmation hearing for Warsh this Tuesday. According to the British "Financial Times" citing multiple insiders, the 56-year-old nominee has conceived a series of reforms: from reducing the frequency of the Fed's information releases to shrinking the balance sheet of over $6.7 trillion. However, the futures market currently shows that there is less than a 50% probability of a 25 basis point rate cut this year—far from meeting Trump's repeated calls on his Truth Social platform for a "significant" and "immediate" rate cut.
Derek Tang of Monetary Policy Analysis warned, "For Warsh, the honeymoon period may be very short." This hints at an awkward situation: if Warsh cannot meet Trump's rate cut demands, he is likely to become the target of the president's public attacks like his predecessor Powell—only this time, the role of "scapegoat" has changed from being called a "fool" to being accused of "betrayal."
Meanwhile, the confirmation process itself is also full of obstacles: Republican Senator Thom Tillis has threatened to block the nomination from going to a full vote. Current Chairman Powell's term will expire on May 15, and Trump warned last week that if Powell fails to leave "on time," he will be fired.
For the market, the core uncertainty is: can Warsh find a way out between Trump's political pressure and the Fed's institutional credibility? Multiple former Fed officials warned that there is a historical example—in the 1970s, Fed Chairman Arthur Burns yielded to Nixon's rate cut demands, ultimately leading to years of stagflation, leaving a historical verdict of "scapegoat."
In other words, whether Warsh chooses to comply or resist, he could become a scapegoat: compliance would repeat Burns's mistake, taking the blame for out-of-control inflation; resistance would follow in Powell's footsteps, becoming the next target of Trump's political fury.
"Reformer"—Warsh Wants to Shake the Fed's "Foundation"
Warsh has long coveted the position of Fed chairman. Eight years ago, he lost to Powell. After Trump's election, he was offered the position of Treasury Secretary, but he made it clear that leading the central bank was his ambition.
In terms of policy stance, Warsh's reform agenda is quite radical. He is deeply dissatisfied with the Fed's current information communication system, particularly disliking the so-called "dot plot"—a chart released quarterly that provides anonymous interest rate forecasts from 19 officials. He warned in a speech a year ago, "Once policymakers publish economic forecasts, they may become prisoners of their own words."
In addition to reducing public statements, Warsh also hopes to lead by example, guiding other officials to reduce their media exposure. BNY Investments Chief Economist and former senior Fed official Vincent Reinhart explained: "Warsh's reason for narrowing communication is that if actions are consistent enough, there is no need to speak all the time. He also believes that over-communication risks over-commitment and makes the committee more vulnerable to political criticism."
On the balance sheet issue, Warsh hopes to shrink the sheet, which has expanded to $6.7 trillion due to large-scale bond purchases during the financial crisis and the COVID-19 pandemic. According to media reports citing insiders, the path he envisions for shrinking the balance sheet would be gradual, not seeking to return to pre-2008 levels, and would require extensive preliminary research. His core logic is: by contracting bank system liquidity to tighten financial conditions, creating space for cutting short-term interest rates.
However, former Fed official and Peterson Institute for International Economics scholar Joseph Gagnon pointed out the inherent contradiction: "He told Trump that through balance sheet policy, significant rate cuts could be achieved. But I guess he didn't tell Trump that this might actually mean higher mortgage rates, not lower." Currently, one of the most respected economists on the Fed committee, Chris Waller, has explicitly rejected the idea of shrinking the balance sheet to pre-crisis levels, calling it "inefficient" and "stupid" because it could trigger market turmoil.
Swinging Stance, Credible?
Warsh studied under monetary master Milton Friedman during his undergraduate years at Stanford University and claims to be deeply influenced by him. In 2006, he joined the central bank as the youngest governor in Fed history and served as an important link between then-Chairman Ben Bernanke and Wall Street and Congress during the financial crisis. Days before Lehman Brothers collapsed, he had already warned about inflationary pressures, representing the hawkish faction within the committee at that time.
However, during Trump's current term, when the president publicly called Powell a "fool" and an "idiot" to pressure for rate cuts, Warsh showed a more dovish stance. He cited an argument改良自前主席 Alan Greenspan, arguing that an AI-driven productivity boom would pave the way for significant rate cuts—a view questioned by multiple FOMC members.
Alan Schwartz, who worked with Warsh at Bear Stearns, believes that Warsh's decisions will be based on economic data rather than White House pressure: "If the facts change, Warsh won't stick to the rules. He has an excellent reputation in financial policy and will strive to find the right answer." Schwartz of Guggenheim Partners added that this also means his stance may adjust with changing circumstances.
Former Reserve Bank of India Governor and University of Chicago scholar Raghuram Rajan reminded that Warsh will take office under "huge political constraints," and potential risks in the private credit market may require him to address financial stability issues in addition to monetary policy challenges.
Trump and Wall Street: Neither Side Is Easy to Deal With
Warsh was not Trump's first choice. According to the British "Financial Times," Trump has long told his inner circle that he prefers to nominate National Economic Council Director Kevin Hassett. But Hassett's candidacy sparked strong backlash on Wall Street—there was deep concern about his absolute obedience to Trump on issues such as tariffs and firing the head of the Bureau of Labor Statistics.
The turning point came when Trump ally and Washington D.C. federal prosecutor Jeanine Pirro launched a criminal investigation into Powell. Powell immediately fought back publicly, calling the investigation a plot to force the Fed to cut rates, making Wall Street clearly see the risk of having a "Trump yes-man" as central bank governor. Heavyweights in the financial world, such as JPMorgan Chase CEO Jamie Dimon, privately pressured Trump to choose another candidate, and Warsh ultimately received the nomination.
Warsh is not entirely unrelated to Trump's circle—he is the son-in-law of Republican donor and Trump's university classmate Ronald Lauder. He also knows Treasury Secretary Besant from the family office of Wall Street tycoon Stanley Druckenmiller, and Besant was the key figure leading the initial nomination interview process.
Senate Confirmation: Republicans Block Their Own First
Warsh's confirmation process faces substantial obstacles. North Carolina Republican Senator Thom Tillis has clearly stated that he will block Warsh's nomination from going to a full Senate vote until the criminal investigation against Powell is dropped. This deadlock raises the possibility that Powell may remain in office after his term expires on May 15.
In response, Trump warned last Wednesday that if Powell does not leave "on time," he will be fired, while expressing continued support for Pirro to proceed with the investigation. Powell stated that he would remain as interim chairman until Warsh receives majority support in the Senate.
Without the support of at least 51 of the 53 Republican senators, Warsh's path to becoming Fed chairman will fail. However, once the investigation into Powell is concluded, the mainstream judgment in political and prediction markets is that the Republican Senate will ultimately not block Warsh from taking up this long-coveted position.
Some observers even believe that the delay in the confirmation process may not be entirely disadvantageous for Warsh. If the court rules favorably in the Cook and Powell-related lawsuits, it could not only unblock the confirmation process but also provide institutional protection for Warsh against White House pressure. Gagnon said bluntly:
"I believe that whatever Warsh may have told Trump, he doesn't want to become the next Arthur Burns, the one who yielded to Nixon's will and ultimately triggered years of stagflation. If the Supreme Court protects Lisa Cook's position, Warsh will probably receive the same protection. At that time, he will think he can do the right thing—and what he thinks is right will likely disappoint Trump."
