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Jerome Powell He’s out, Kevin Warsh is in. At least, that’s the plan. Powell’s term expires on May 15, and President Trump’s nomination of Lorsch is expected to pass through Congress with relative ease.
Nomination took place and workshops Wall Street A surprise, given the White House’s sometimes intense criticism of Powell for keeping interest rates steady for much of the past year. Historically, Warsh has been viewed as a hawk who has criticized quantitative easing and the use of low interest rates to stimulate the economy.
However, Goldman Sachs does not believe that a Warsh-run Fed will automatically mean that interest rates will remain higher than they have been, and in a new research report, notes that interest rate cuts and quantitative easing are still on the table.
“We do not expect a significant reduction in Fed volume Balance sheet “If Warsh is confirmed,” Goldman Sachs analysts wrote. “Warsh is less interested in dealing with.” Economic inflation The picture may put him on the dovish side of the current FOMC policy debate.
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Will Kevin Warsh’s Fed cut interest rates?
The Fed does not directly control how much interest banks charge, but indirectly, changes in the federal funds rate (FFR) — the rate at which banks borrow to each other overnight — can directly affect it.
Treasury yields, which banks use to set interest rates on things like mortgages, move directionally, but not perfectly, with changes in the additional financing rate.
Federal Reserve Bank Monetary policy Dictated by a Dual mandate:
- Low inflation
- a little Unemployment
This mandate is not as easy as it seems because the two goals often conflict with each other. Low rates reduce unemployment but cause inflation and vice versa.
This dynamic is why Jerome Powell, who will soon leave office, remained on the sidelines on interest rates last year until September, concerned that cutting rates would lead to higher inflation even as inflationary tariffs kicked in.
Under Warsh, some worry that his past hawkishness will mean a slow-taping Fed awaits in 2026, but Goldman Sachs is not convinced that will prove true, since it does not appear concerned that inflation will consolidate itself in the economy and views AI as deflationary.
“In 2025, it said, the Trump administration’s deregulatory policies and potential spending cuts will be sufficiently disinflationary to outweigh any one-time impact of tariffs on prices,” Goldman Sachs noted. “Because he believes that”Amnesty International “It will be a significant deflationary force,” he said. The Fed should not keep interest rates high just in response to strong pressures. gross domestic product growth.
Goldman Sachs currently expects that Federal Reserve Interest rates will be cut twice in 2026.
“We expected the next rate cut of 25 basis points in June, followed by a final cut in September,” Goldman Sachs previously wrote on January 28 after the FOMC left interest rates unchanged.
Others are more optimistic. Veteran fund manager Louis Navier has long believed that the deflationary impact of AI on productivity will pave the way for the Fed to be friendlier.
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“There is no doubt that AI enhances productivity and also reduces jobs in American companies, so The Fed will cut key interest rates at least three times this year“,” Navellier wrote in a note shared with me.
Warsh is likely to face opposition to major changes to quantitative easing
The Fed had been selling bonds off its balance sheet last year, pushing up interest rates, but it ended quantitative tightening in December and is now buying short-term Treasuries as bonds mature.
The balance sheet turnaround has helped keep Treasury yields in check, but many worry that Warsh, a critic of the Fed’s balance sheet, will return to quantitative tightening.
More from the Fed:
- Billionaire Dalio sends two words to Fed’s chosen Warsh
- Fed Chair Powell sends a depressing message about future interest rate cuts
- Warsh’s nomination raises Fed independence concerns on Wall Street
Goldman Sachs expects Warsh will want to reduce the size of the Fed’s balance sheet, but there may not be much support among other Fed officials for doing so.
the Investment bank Identify three reasons why Warsh might want to reduce the balance sheet:
- The Fed plays too large a role in financial markets and should seek to stay out of crisis asset markets.
- Previous asset purchase programs caused “misallocation of capital” by “redirecting capital from the real domestic economy to financial assets” and were “a material part of the inequality story.”
- A larger balance sheet contributes to higher inflation.
- The Fed’s asset holdings “propelled” government financing costs, enabling fiscal policymakers to run larger deficits.
However, these arguments may largely fall on deaf ears.
“Most Fed policymakers and Fed Board members are likely to have a different view on these points,” Goldman Sachs said. “They see balance sheet growth relative to the size of the economy as a necessary consequence of faster growth… We do not expect a significant decline in the size of the Fed’s balance sheet.”
