Warsh and Policy: Steering the Fed Between Crisis Lessons, AI Optimism

Recent discussions about Kevin Warsh’s potential nomination to chair the Federal Reserve focused on more than politics. Warsh’s experience spans the 2006–2011 period, during the global financial crisis. At that time, the Fed deployed large-scale quantitative easing (QE) to stabilize markets. Warsh criticized QE, warning of potential inflation, though it ultimately prevented a deeper economic collapse. This history explains his current caution toward expanding the Fed’s balance sheet.


Fed Balance Sheet and the Yield Curve


Warsh argues that the Fed’s balance sheet remains historically high relative to GDP, especially after pandemic-era expansions. He advocates gradual reduction through asset sales, a move likely to lift bond yields. His concern is not only inflation: he wants to prevent the Fed from indirectly financing government deficits. Maintaining a clear separation between monetary and fiscal policy, he insists, is essential for long-term economic stability.


Betting on Productivity and AI


Warsh also offers an optimistic view on inflation. He believes a surge in productivity driven by artificial intelligence could offset price pressures. He draws a parallel with the 1990s, when technological gains allowed sustained growth without overheating. Treasury officials describe the U.S. economy as entering a “new productivity boom,” potentially enabling lower interest rates without fueling inflation.


Navigating Dual Policy Challenges

The biggest challenge lies in combining short-term rate cuts with asset sales. Lowering rates stimulates borrowing, while selling bonds raises yields and tightens credit. Rapid implementation could trigger market volatility, though a phased approach may minimize shocks. A steeper yield curve could also boost bank profitability and lending, providing a positive offset.


Markets and Congress: Vigilant Watch


Investors are cautious: Warsh must convince Fed colleagues of this dual strategy. Even if aligned with presidential priorities, he remains one voice among twelve. Congressional hearings will test his ability to reassure lawmakers that Fed independence remains intact—a priority amid widespread concerns that autonomy could erode post-Powell.



Most views paint Warsh as a pragmatic economist: a crisis-era veteran balancing balance sheet reduction with a productivity-driven outlook, while managing political and market pressures. His success will depend on navigating conflicting tools and safeguarding the Fed’s autonomy in a challenging economic and political environment.