Warsh may struggle to lay down new rules of the road for Fed

• Warsh has called policy rules 'aspirational' rather than binding, and recently cited productivity gains as justification for rate cuts even with inflation above the Fed's 2% target, aligning with Trump's preferences
• Colleagues describe Warsh as 'rules with discretion' - hawkish on inflation but pragmatic about markets and politics, not 'hidebound' to strict monetary frameworks despite his Hoover Institution affiliation
• Warsh aims to shrink the Fed's balance sheet from over $6 trillion to around $3 trillion, but acknowledges changes 'will take time' and cannot happen overnight, with success dependent on building market trust in Fed independence

Market Summary: Kevin Warsh's Fed Nomination Raises Questions on Policy Direction

Key Development:

Kevin Warsh, 55, former Federal Reserve Governor and Stanford Hoover Institution fellow, has been nominated by President Trump to lead the Federal Reserve. Senate confirmation hearings are scheduled before May 22, when current Fed Chair Jerome Powell's term expires.

Central Policy Tension:

Warsh advocates for a rules-based, limited-footprint central bank focused on inflation control, drawing from monetarist principles of Milton Friedman and John Taylor's policy rules. However, he has also acknowledged these rules are "aspirational" and demonstrated pragmatism during his previous Fed tenure, including support for crisis-era bond purchases he later criticized.

Key Policy Areas Under Scrutiny:

*Balance Sheet:* The Fed's current $6 trillion balance sheet is double the $3 trillion Warsh suggested would be appropriate based on economic growth. He has indicated shrinking it would be difficult and must occur gradually, though colleagues remain skeptical about whether a large balance sheet actually creates problems.

*Interest Rates:* Despite inflation above the Fed's 2% target, Warsh has suggested rates could fall, citing productivity gains. Standard Taylor rule models indicate current rates are appropriate, requiring explanation if he deviates.

*Independence Concerns:* Analysts emphasize Warsh must demonstrate independence from Trump, who desires lower rates, to maintain investor confidence in U.S. Treasuries as the global risk-free asset.

Market Implications:

A "less-interventionist" approach could imply higher long-term rates, potentially conflicting with Trump's preference for lower government debt and mortgage rates amid massive federal deficits and growing bond issuance. Success depends on building market trust in Fed independence and inflation-fighting credibility.