Donald Trump's nomination of Kevin Warsh to lead the Federal Reserve has triggered a market repricing of policy direction. The candidate, a former Fed Governor, has long advocated for a substantial reduction of the central bank's balance sheet, a stance that creates a potential conflict with Trump's repeated demands to lower long-term borrowing costs, prompting investors to begin assessing how this policy tension will influence the bond market's trajectory. On Friday, long-term Treasury yields rose, with the spread between 30-year and 2-year yields widening to 1.35 percentage points, nearing its highest level since 2021. Major asset management firms believe this market volatility reflects traders digesting Warsh's recent statements, in which he criticized the Fed's massive bond-buying programs during both the 2008 financial crisis and the 2020 pandemic. Greg Peters, Co-Chief Investment Officer of PGIM Fixed Income, stated, "You have someone who is opposed to balance sheet expansion, yet is in a context where there is a desire to lower rates. That is a point of tension, that's what the market is focused on, and that's why the yield curve is steepening." However, billionaire investor Stanley Druckenmiller, Warsh's long-time mentor, told media on Friday that the policymaker is not a permanent "hawk," noting, "I've seen him go both ways on monetary policy." Druckenmiller believes Warsh holds a "very open" attitude towards the monetary policy path of former Fed Chair Alan Greenspan, adding, "Warsh now strongly believes you can achieve growth without triggering inflation." Warsh's stance on quantitative tightening (QT) has become a core concern. Serving as a Fed Governor from 2006 to 2011, he later became a prominent critic of certain central bank policies, particularly the multiple rounds of quantitative easing that swelled the Fed's holdings of U.S. Treasuries and other assets to a peak of nearly $9 trillion. He argues that the persistent existence of a large balance sheet distorts asset prices and risks entrenching inflationary pressures, although he also acknowledges that the U.S. economy faces downside risks requiring lower policy rates. In a widely noted speech in April, Warsh stated, "Since 2008, the Fed has been the most important buyer of U.S. Treasuries—and other liabilities backed by the U.S. government," adding, "This is representative of the Fed's growing recognition of the economy." The Fed ended its QT program late last year to shrink its balance sheet due to concerns about liquidity drying up in short-term funding markets—which somewhat alleviated worries about demand for sovereign debt issuance, with analysts predicting an expansion of central bank bond purchases. Mark Dowding, Chief Investment Officer at RBC BlueBay Asset Management, said, "The issue is, if you justify rate cuts by shrinking the balance sheet, that does nothing to lower long-term rates and improve mortgage affordability, which is what Trump wants." Druckenmiller offered strong support for Warsh's policy flexibility, attempting to correct the market's perception of him as a "permanent hawk." The billionaire investor said in an interview Friday, "It is incorrect to position Warsh as always being hawkish." Warsh earned his reputation for hawkishness during his tenure as a Fed Governor from 2006 to 2011. Transcripts from Federal Open Market Committee meetings during the most turbulent period of the 2008 financial crisis show he reiterated concerns about inflation just days before the collapse of U.S. investment bank Lehman Brothers. But Druckenmiller pointed out that, despite initial skepticism, Warsh ultimately gave his "full support" to rate cuts during the financial crisis and also supported cuts early in the pandemic. In 2018, the two co-authored a column arguing why the Fed should not raise rates immediately, yet the central bank decided to hike anyway. Druckenmiller noted the Fed was later forced to reverse its decision because "the market crashed." Druckenmiller believes that if Warsh is confirmed by the Senate, one of his biggest challenges will be balancing the economic growth driven by artificial intelligence against the need to avoid triggering further inflation. As a fellow at Stanford University, Warsh's connections and proximity to Silicon Valley position him well to understand the possibilities and risks of this technology. Druckenmiller added that Warsh's "tech network" would be particularly useful. "I can't think of anybody on the planet who is better equipped," Druckenmiller said. Since leaving the Fed, Warsh has served as a partner at the billionaire's family office, Duquesne Capital Management. Questions remain about policy coordination. Bill Campbell, a portfolio manager at DoubleLine, pointed out that a contradiction would arise if Warsh advocates for lower short-term rates while simultaneously pursuing balance sheet reduction amid growing government debt and persistently high inflation. "You can't have substantially lower rates and a shrinking [Fed] balance sheet until you get a handle on fiscal and inflation," he said, adding, "I believe Warsh understands that completely." Druckenmiller is also the long-time mentor of U.S. Treasury Secretary Janet Yellen. He first hired Yellen at Soros Fund Management over three decades ago, and the current Treasury Secretary later used Druckenmiller's capital to start her own hedge fund, Key Square Capital. Yellen also believes that an AI-driven productivity boom will allow the Fed to cut rates without sparking inflation. Previous reports indicate Yellen and Warsh are largely acquainted through their shared connection to Druckenmiller. With Warsh's nomination for Fed Chair, this investor now stands among Wall Street's most influential economic thinkers, and his worldview is shaping how both Yellen and Warsh approach economic policy. Although Druckenmiller has supported other Republicans, he has not donated to Trump's recent presidential campaign and once described the then-candidate as a "blowhard." However, he now has a direct line to the administration's most crucial economic policymakers. "I'm very excited about the collaboration between him and Yellen," he said, "Coordination between the Treasury Secretary and the Fed Chair is the ideal state."