Kevin Warsh and the Fed

President Trump announced this week that he selected, subject to Senate approval, Kevin Warsh to be the next chairman of the Federal Reserve Board thus ending this season's apprentice competition. Warsh seems to be a chameleon because doves see in him his call for a lower federal funds rates and hawks see his past positions that called for higher interest rates and a smaller Fed balance sheet. It seems the immediate market response was a collapse in gold and silver prices that were buoyed by the debasement trade.

In my view both hawks and doves will be disappointed. In the short run I think he will support lowering the Fed Funds rate by another 50 basis points taking it down to a 3%-3.25% range in the belief that rising productivity will lower the inflation rate to the Fed's long missed 2% target. As stated here previously, I think that is a losing bet.  ( See: https://shulmaven.blogspot.com/2025/12/2026-year-of-turbulence.html )  Further, consistent with recent market behavior I do not think that long rates will move lower thereby steepening the yield curve. Rick Rieder, Blackrock's CIO and former apprentice for the job) articulated a case for a 3-4-5 yield curve with funds at 3%, the 10-Year at 4%, and the 30-year at 5.5%. That looks like where we will end up this year, but with the 10-Year closer to 4.5%.

In the short run a Warsh Fed will let the economy run hot. That will bring with it higher profits, higher inflation, higher long term interest rates, and a volatile stock market with a downward bias. But if we step back a bit, it is becoming clearer by the day that we are in an era of fiscal dominance. The Fed would thus accommodate continual deficits of 6% of GDP that will put upward pressure on inflation. When the rubber hits the road the Fed will either be forced to tighten triggering a recession or adopt yield curve control to manage the long end of the curve. It will be only then that we will find out if Warsh is a hawk or a dove. If the Fed moves toward yield curve control the debasement trade will have legs.