#WalshonFedPolicy

✨February 9, 2026 – Kevin Warsh, whom Donald Trump nominated as Federal Reserve Chairman on January 30, 2026, continues to generate both hope and apprehension in the markets with his views on Fed policies.
Warsh, a former Fed Board Member (2006-2011), has long maintained a classic inflation hawk profile, but his statements at the end of 2025 and the beginning of 2026 show a significant shift. In line with Trump's demands for lower interest rates, he has recently shifted towards a pro-interest rate cut stance. However, this support comes not through traditional expansionary policies, but within a very different framework.
✨Warsh's Main Policy Lines.
🔹A combination of interest rate cuts + aggressive balance sheet reduction
Warsh has argued for years that the Fed's balance sheet size of approximately $7 trillion is "too much." It appears that in the new period, the Fed plans to accelerate its balance sheet reduction process and aim for a smaller Fed balance sheet in the long term. This approach could create a "quantitative tightening" (QT) pressure that could push long-term bond yields upward while lowering the short-term policy interest rate.
🔹The AI and Productivity Boom Thesis
One of Warsh's most striking arguments is the deflationary pressure and productivity increase that AI will bring. According to him, the AI-driven productivity leap makes a period possible where even high growth and high wages will not trigger inflation. This view questions the Fed's classic "high growth = inflation risk" paradigm and opens the door to a more aggressive rate cut. 🔹Less Guidance, More Market Discipline
Warsh criticizes the Fed's "high-frequency forward guidance" approach (dot plot, intensive communication before press conferences). Instead, he proposes a less verbal guidance, more transparent but less predictable policy style. This approach is considered to potentially increase volatility in bond and equity markets in the short term, but could strengthen inflation credibility in the long term.
✨Market Reactions and Expectations
🔸Following Trump's nomination announcement, gold lost over 8% of its value, experiencing one of its sharpest daily drops in 40 years; Bitcoin fell below $70,000.
🔸US 10-year Treasury yields, however, moved in the opposite direction, rising – the pressure of balance sheet reduction expectations on long-term interest rates is being felt.
✨Disagreement continues among analysts:
🔹Some institutions believe Warsh will bring about further interest rate cuts (a 100-150 basis point cut is considered possible in 2026).
🔹Others argue that the hawkish stance on the balance sheet will increase long-term yield volatility and that the "high interest rate + low balance sheet" dilemma could put pressure on risk assets. Kevin Warsh is expected to take office in May 2026 following his Senate confirmation. Current market pricing points to a scenario of easing in the short term and liquidity tightening in the medium term. However, how quickly and to what extent Warsh's vision of a "new Fed regime in the age of AI" will be implemented remains the most critical macroeconomic question for 2026.