Kevin Warsh's nomination stems from his ability to satisfy Trump's multifaceted demands for a Fed Chair. Warsh's potential return to the Fed may signal a revival of monetarism and an acceleration of Fed reforms, with anticipated focus on regulation, monetary policy, and institutional overhaul. However, aggressive implementation of a "balance sheet reduction + interest rate cuts" combo faces certain constraints. While his nomination could cause significant short-term market volatility, the long-term trajectory of some assets is unlikely to be fundamentally altered by Warsh.

According to a Xinhua News Agency report from New York on January 30th, US President Trump announced via social media his nomination of former Federal Reserve Governor Kevin Warsh for the next Fed Chair. This nomination still requires approval from the Senate, and we provide the following analysis.

Warsh's nomination is attributed to his alignment with Trump's "want-it-all" requirements. Beginning his career at Morgan Stanley, Warsh served as a Fed Governor from 2006 to 2011, becoming the youngest governor at the time. He acted as a crucial link between Wall Street and the Fed during the crisis but resigned in 2011 in opposition to QE2. Compared to other candidates, aside from Hassett, Warsh's family has closer ties to Trump, satisfying the loyalty criterion. Furthermore, Warsh possesses an independent character, shed his "hawkish label" during this selection process by marginally turning dovish to support rate cuts, and has long been critical of the Fed while advocating for reform, thus meeting Trump's various demands for a Fed Chair.

Warsh's potential return to the Fed might represent a comeback for monetarism and progress on Fed reform. His famous quote, "Inflation is a choice," echoes Milton Friedman's assertion that "inflation is always and everywhere a monetary phenomenon." The core of Warsh's hawkish stance lies in controlling inflation expectations through money supply management and eliminating forward guidance, rather than mechanically maintaining high interest rates, indicating he is not hawkish solely on the interest rate front. He believes QE exacerbated wealth inequality and harmed low-income groups, arguing that the Fed should establish a clear exit strategy and that the balance sheet size should merely meet currency circulation needs. He has long criticized the Fed's extensive use of quantitative easing for causing inflation, asset bubbles, and wealth disparity, and for relying excessively on data-dependent decision-making without sufficient foresight.

Warsh may focus his efforts on three dimensions: regulation, monetary policy, and reform. However, vigorously promoting a combination of "balance sheet reduction + interest rate cuts" faces some obstacles. The overarching direction of Warsh's policies might be a shift from Wall Street to Main Street. On regulatory policy, he has long criticized the Dodd-Frank Act and Basel III, suggesting the Supplementary Leverage Ratio could see further adjustments and bank supervision might be simplified. His monetary policy would likely adhere to the "QT + rate cuts" combo, where rate cuts support fiscal policy and the real economy, while QT aims to curb wealth inequality, inflation expectations, and asset price bubbles. While theoretically sound, aggressively pushing QT now is constrained; the Fed's ample reserves framework and floor system somewhat limit the pace of balance sheet reduction, while rebounding fundamentals and inflation risks restrict the scope for significant rate cuts. We expect subsequent policies to be implemented gradually rather than through abrupt shifts. On the reform front, personnel appointments at the Fed and selections for regional Fed presidents are likely to be priority items.

Warsh's nomination could significantly impact markets in the short term, but the long-term logic for some assets is difficult to change solely because of him. Regarding the US dollar, Warsh advocates for sound monetary policy and low inflation to maintain dollar strength and opposes using dollar devaluation for trade advantages. For US Treasuries, forcefully cutting rates or aggressively reducing the balance sheet could lead to further steepening of the yield curve, making the intensity of policy moves crucial for Treasury yield direction. For US equities, the overall macro direction is favorable, but his advocacy for a smaller central bank might increase market volatility; opportunities in small and medium-sized enterprises under a Main Street focus warrant attention. For precious metals, short-term headwinds exist from a stronger dollar and liquidity contraction expectations, suggesting shorting volatility might be a near-term tactic, but the long-term narrative is unlikely to be drastically altered by Warsh. Industrial metals may also face pressure short-term due to monetary and liquidity concerns, though effective policy stimulation of credit demand could provide additional support on the demand side.

Risk factors include: US inflation rebounding more than expected; unexpected changes in the US labor market; Trump's tariff policies exceeding expectations; unforeseen erosion of Fed independence; and uncertainty surrounding the final confirmation of the Fed Chair nominee.