Warsh at the Fed: A Calculated Risk?

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Right, let’s talk about Wall Street. It’s been a good run, hasn’t it? Seventeen years of mostly upward momentum. You’d almost forget crashes are…you know, a thing. Like taxes, or realizing your best jeans no longer fit. The Dow, S&P 500, Nasdaq…they’ve been behaving remarkably well since 2009. Except for that brief wobble in 2020 – honestly, everything wobbled then – and a slightly more persistent grumble in 2022. But generally? Up. Which, naturally, makes me nervous. Because the higher they climb, the further they have to fall.

And speaking of falls, we have a potential catalyst brewing. A change at the top of the Federal Reserve. Jerome Powell’s term is ending, and let’s just say the previous administration wasn’t exactly sending him Valentine’s cards. Enter Kevin Warsh. Nominee. Potentially, the next person in charge of the nation’s money supply. Which, frankly, is terrifying. Not because he’s inherently bad – though, let’s be real, no one is inherently good when wielding that much power – but because he’s…complicated. And Wall Street hates complicated.

He’s got experience, sure. Sat on the FOMC, the committee that actually makes things happen. But he also has…opinions. Strong ones. And those opinions, I suspect, are going to ruffle a few feathers. Or, more accurately, trigger a full-blown avian riot on the trading floor.

Kevin Warsh is Inheriting a $6.6 Trillion Headache

Warsh was on the Board of Governors during the Great Recession. He saw it all. He lived it. And apparently, he decided the Fed was too…generous. Too willing to print money and buy bonds. Which, in fairness, is a valid criticism. But it’s also a bit like complaining about the free drinks at a party. Sure, it might lead to some questionable decisions later on, but in the moment? It’s a good time.

The Fed’s balance sheet ballooned during the crisis – from less than $900 billion to nearly $9 trillion. It’s come down a bit, hovering around $6.6 trillion now. But Warsh wants to deleverage. Significantly. He wants to shrink it back down to…well, something smaller. Which, logically, makes sense. But Wall Street doesn’t do logic. It thrives on cheap money. It’s addicted to it, frankly. And taking that away? That’s going to cause withdrawal symptoms. Expect volatility. Expect tantrums. And expect a lot of very angry traders.

Dumping trillions in Treasury bonds and mortgage-backed securities will drive up yields, increase interest rates, and generally make borrowing more expensive. President Trump, who has a rather…unique understanding of economics, is practically demanding lower rates. Investors are expecting them. Warsh is about to deliver the opposite. It’s going to be…interesting. And by “interesting,” I mean a potential disaster.

Warsh’s Hardline Stance on Inflation Might Fracture the FOMC

Look, the Fed has two jobs: maximize employment and stabilize prices. Warsh, historically, has been laser-focused on the latter. Even during the financial crisis, when unemployment was soaring, he was more concerned about inflation. It’s a bit like prioritizing your skincare routine during a house fire. Important, sure, but maybe not the most pressing issue at hand.

It doesn’t mean he’ll necessarily push for higher rates. Just that he’ll be…difficult. And the last thing the FOMC needs right now is more division. They’re already barely holding it together. Every meeting is a tense negotiation, with at least one dissenter. The October and December meetings? Opposite directions. It’s like a family road trip where everyone wants to go to a different destination. Warsh won’t necessarily change the outcome of those meetings, but he’ll make the arguments louder, the disagreements more public, and the whole process infinitely more stressful.

And investors? They hate that. They want predictability. They want stability. They want a central bank that’s rowing in the same direction. Warsh, with his stubborn principles and unwavering focus on inflation, is likely to throw a wrench in the gears. Which, honestly, is a bit of a thrill to watch. But also, potentially, very bad for your portfolio.

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2026-02-28 14:42