Warsh Cycle
In January 2026, President Donald Trump formally nominated former Federal Reserve Governor Kevin Warsh to succeed Jerome Powell as Chair of the Fed. Warsh, who served on the Fed’s Board from 2006 to 2011, is a seasoned Wall Street figure and has been described by Trump as “central casting” for the role. His nomination signals a pivot towards a more supply-side oriented philosophy at the central bank, combining a newfound openness to interest rate cuts with a traditional scepticism towards the Fed’s expansive balance sheet.
The expectation is that a Fed led by Warsh would mark a decisive shift towards a more restrained monetary authority, characterised by a reduced footprint in financial markets and a renewed emphasis on inflation discipline. The defining challenge of his tenure would be shrinking the Fed’s balance sheet without inadvertently tightening financial conditions or undermining domestic growth. For the US Treasury market, however, this transition need not be disruptive. If executed with careful coordination alongside fiscal policy, it could improve market functioning and help dampen the volatility that has characterised recent years.
Warsh has long argued for a leaner balance sheet and a move away from the unconventional tools that dominated the post-global financial crisis era, a stance that has historically earned him a hawkish reputation. More recently, however, he has articulated a more nuanced framework, centred on the potential for a technology-driven productivity boom. Where gains from artificial intelligence and innovation allow for non-inflationary growth, Warsh has suggested he would support lower borrowing costs. This points to a regime in which policy rates remain flexible, even as excess liquidity is gradually withdrawn from the system.
The principal risk of this approach is that balance sheet reduction, in isolation, could lift risk premia and push up term premia on long-dated Treasuries. As the central bank steps back from its implicit market backstop, investors may demand higher compensation for holding duration, raising discount rates in the process. These risks appear more manageable, however, if monetary normalisation is aligned with a predictable Treasury issuance strategy. In this respect, Warsh’s thinking appears closely aligned with that of Treasury Secretary Scott Bessent, particularly on the need to minimise policy-driven volatility in bond markets.
Greater predictability around auction sizes and maturity profiles, potentially supported by targeted buyback operations, would help anchor long-end yields. At the same time, regulatory reform that lowers banks’ structural demand for reserves could free up dealer balance sheets, improve intermediation and enhance Treasury market depth. Combined with a shift away from heavy forward guidance towards a more fundamentals-driven framework, a Warsh-led Fed could ultimately stabilise long-term yields and reinforce US Treasuries’ role as the world’s pre-eminent risk-free benchmark.
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