In a landmark decision, the US Senate confirmed Kevin Warsh as the next Chairman of the US Federal Reserve (Fed). The 54-45 vote was the narrowest margin for a Fed chair since 1977, underscoring a deep partisan divide. While Republicans rallied behind President Donald Trump’s pick, Democrats cited concerns over political autonomy.
Departing Chair Jerome Powell has taken the rare step of announcing that he will remain on the Fed Board as a governor. His term as governor does not expire until 2028, and he intends to serve it amid the ongoing investigation into Fed building renovations.
Warsh has signaled a definitive regime change for the central bank. He views that an AI-driven productivity boom is disinflationary, which means price increases will be slower, potentially granting the Fed room to lower its policy rate without igniting prices.
Conversely, Warsh is a vocal critic of forward guidance, preferring a more data-dependent approach and expressing a desire to aggressively shrink the Fed’s USD 6.7 trillion balance sheet, by reducing the amount of bonds and assets it owns to bring down the amount of money circulating in the economy.
This combination of cutting policy rates while reducing the balance sheet is expected to cause a steepening of the yield curve, resulting in a wider spread between short- and long-term bonds. Lowering the policy rate pulls down the short end of the curve, while shrinking the balance sheet increases the supply of long-term bonds, potentially driving up term premium or the yields on longer-dated debt.
While markets are currently pricing in a hold for 2026 due to persistent energy-driven inflation, We anticipate at least one rate cut at the latter part of the year amid Warsh’s near-term dovish inclinations to boost the economy.
However, investors should focus more on his commentary regarding inflation, the labor market, AI integration, and the impact of the ongoing Middle East conflict on the economy as he begins his new role as Fed chair.
SOPHIA THERESE “PIA” BONIFACIO is a Research Officer at Metrobank, covering local and offshore macroeconomic research. She obtained her Bachelor’s degree in Economics with a Specialization in Financial Economics, cum laude, from the Ateneo de Manila University and is a Certified UITF Sales Person (CUSP). Pia enjoys long road trips and is a self-proclaimed milk tea connoisseur.
