How will Federal Reserve Chair Jerome Powell's contradictory strategy of "interest rate cuts + balance sheet reduction" affect the stock and bond markets, the US dollar, and the crypto market?

President Trump officially announced the nomination of hawkish candidate Kevin Warsh to take over the Federal Reserve, advocating for “rate cuts but balance sheet reduction.” This article analyzes what potential impacts this could have on the stock market, bond market, US dollar, and the crypto market.
(Background summary: Will Warsh push funds into Bitcoin? After being nominated by Trump, gold fell below $5,000, and BTC briefly rebounded to $83,700.)
(Additional context: Trump’s favored Fed Chair Kevin Warsh on Bitcoin: It’s not a dollar substitute, but a “supervisor” of monetary policy.)

Table of Contents

• From Hawk to “Pragmatist”: A Shift in Monetary Policy Belief
• “Rate Cuts + Balance Sheet Reduction”: A Dangerous Balancing Act
• “Good Cop” and “Software”: Warsh’s Bitcoin Paradox
• The Era of Liquidity Tightening: The Survival Rules of Cryptocurrency
• The Ghost of CBDC: The Future of Money in Warsh’s Eyes
• The Senate Roadblock: An Unfinished Political Game
• The Outline of a New Order

On January 30, President Trump officially announced his nomination of Kevin Warsh to succeed Jerome Powell as the next Federal Reserve Chair. This is a nine-year wait for an appointment: in 2017, Warsh was a finalist for Fed Chair but ultimately, Trump chose Powell.

Nine years later, history rhymes.

55-year-old Warsh is not a stranger. From 2006 to 2011, he was one of the youngest members of the Federal Reserve Board, witnessing every decision during the 2008 financial crisis. He saw the collapse of Lehman Brothers, participated in debates over quantitative easing, and was labeled “hawkish” for opposing QE2.

But Warsh in 2026 is no longer the steadfast inflation warrior of 2010.

His stance has shifted, his ambiguous attitude toward Bitcoin, and the $4.5 trillion balance sheet he’s about to oversee will redefine the game rules of global financial markets. Especially for cryptocurrencies, this former “software, not money” Fed candidate could bring impacts far more complex than markets imagine.

From Hawk to “Pragmatist”: A Shift in Monetary Policy Belief

To understand how Warsh might manage the Fed, we must first look back at his past.

In September 2008, Lehman Brothers collapsed. The global financial system was on the brink of collapse, unemployment soared to 10%, and the economy was sliding into deflation. During this crisis, the Fed launched unprecedented quantitative easing—buying government bonds and mortgage-backed securities to inject liquidity into the markets.

Most economists saw this as necessary. But Warsh disagreed.

He repeatedly warned of inflation risks in Fed meetings, even when data showed deflation was the real threat. In 2010, as the Fed prepared to launch QE2 with unemployment still at 9.8%, Warsh was one of the most vocal opponents. He believed the Fed’s expanding balance sheet would “seriously distort asset prices and sow the seeds of inflation.”

His insistence on fighting inflation during the most fragile economic moments earned him the reputation of “the hawk among hawks.”

However, in 2025, Warsh said some things that puzzled Wall Street.

In a CNBC interview, he criticized the Fed’s “hesitation to cut rates” as “a major blunder.” He said, “Presidential pressure on the Fed is justified because we need a ‘systemic reform’ in policy implementation.”

Translated, this means: the person who once opposed easing now believes the Fed isn’t easing enough.

This shift isn’t without logic. In a Wall Street Journal op-ed, Warsh proposed a seemingly contradictory policy mix: cut rates while shrinking the balance sheet. His argument was that the Fed should “abandon the dogma that rapid economic growth and high wages cause inflation.” True inflation, he argued, is caused by “excessive government spending and money printing.”

He believes that AI-driven productivity revolutions can enable economic growth at low interest rates without runaway prices.

This is a subtle repositioning. He’s no longer the crisis-era hawk shouting “inflation is coming,” but an optimistic believer that technological progress can break traditional economic rules—at least on the surface.

“Rate Cuts + Balance Sheet Reduction”: A Dangerous Balancing Act

Warsh’s policy framework can be summarized in four words: Rate Cuts and Balance Sheet Reduction.

It sounds contradictory. Rate cuts usually mean injecting liquidity to stimulate the economy; balance sheet reduction means withdrawing liquidity, tightening money supply. Traditionally, these tools point in opposite directions.

But Warsh has his logic.

He sees the past fifteen years’ problem not as high or low interest rates, but as an excessively large balance sheet. Before the 2008 crisis, the Fed’s total assets were under $1 trillion. By the peak in 2022, this ballooned to nearly $9 trillion. Even after several years of reduction, it remains around $6.8 trillion.

Warsh argues that this enormous balance sheet creates a distorted financial environment: “Wall Street’s money is too cheap, while Main Street’s credit is too tight.” Large financial institutions can easily access low-cost funds, but small and medium-sized enterprises and consumers face higher borrowing hurdles.

His solution: lower the benchmark interest rate to support the real economy, while accelerating balance sheet reduction to correct market distortions.

What does this mean for financial markets?

For stocks: Short-term, it could be positive (rate cuts), but medium to long-term, liquidity tightening (balance sheet reduction) may exert pressure. Over the past 15 years, US equity valuations have largely depended on Fed liquidity injections. If that engine stalls, markets will need new valuation supports.

For bonds: Lower short-term rates and reduced Fed bond purchases could steepen the yield curve. Long-term bondholders face the risk of falling prices.

For the US dollar: The most unpredictable part. Rate cuts usually weaken the dollar, but if Warsh succeeds in keeping inflation low while maintaining growth, the dollar could strengthen.

“Good Cop” and “Software”: Warsh’s Bitcoin Paradox

For crypto investors, Warsh is a difficult figure to interpret.

On one hand, in a 2022 column, he bluntly wrote that many private crypto projects “are scams” and “worthless.” He said, “The term ‘cryptocurrency’ itself is misleading because it’s software, not money.”

On the other hand, he admits Bitcoin could be “a sustainable store of value, like gold.” In recent interviews, he even called Bitcoin “the good policeman of monetary policy”—meaning Bitcoin’s existence imposes discipline on central banks, forcing them not to print money recklessly.

More interestingly, his investment record shows he’s not entirely opposed. He has invested in Bitwise Asset Management (crypto index funds), Basis (an algorithmic stablecoin project), and has served as an advisor to Electric Capital (a blockchain-focused VC).

This is typical Wall Street pragmatism: criticizing an asset class’s essence doesn’t prevent profiting from it.

In essence, Warsh doesn’t believe cryptocurrencies will replace fiat money, but he believes people will continue to buy into the narrative.

The Era of Liquidity Tightening: The Survival Rules of Cryptocurrency

If Warsh takes office smoothly and implements his policy framework, the crypto market will face a fundamental environment shift.

Over the past five years, crypto’s boom has been highly correlated with Fed liquidity. The bull market of 2020–2021 was built on zero interest rates and unlimited QE. When money is almost free, investors naturally seek high-risk, high-return assets. Bitcoin, Ethereum, meme coins—all beneficiaries of this liquidity feast.

The 2022 crash precisely aligned with the start of rate hikes and balance sheet reduction.

What does Warsh’s “rate cuts + balance sheet reduction” mean for crypto?

Short-term impact: likely chaos. Rate cut signals may be bullish, but balance sheet reduction expectations will suppress risk appetite. Markets could swing wildly between these forces.

Medium-term impact: overall liquidity tightening. Warsh explicitly aims to significantly shrink the Fed’s balance sheet, meaning the liquidity engine supporting risk assets over the past 15 years will gradually fade. For highly speculative tokens like altcoins and meme coins, this is a structural bearish signal.

Long-term impact: the most intriguing part. Some analysts believe that a more hawkish Fed could actually strengthen the crypto narrative, especially for Bitcoin, as a hedge against tightening and centralized monetary control.

In other words, if Warsh succeeds in tightening liquidity, the narrative of Bitcoin as “digital gold” could be reinforced. When central banks stop printing, a supply-fixed asset outside their control suddenly becomes more attractive.

This is the crypto paradox: it needs liquidity to push prices higher but also needs monetary discipline to prove its value.

The Ghost of CBDC: The Future of Money in Warsh’s Eyes

In debates over stablecoins and CBDCs (central bank digital currencies), Warsh’s stance is clear: he supports CBDCs but opposes stablecoins.

This is a thought-provoking position.

Stablecoins like USDT and USDC are issued by private companies and pegged to the dollar. They play a key role in crypto ecosystems, acting as bridges between fiat and crypto assets. But Warsh clearly distrusts these private-issued substitutes.

He has criticized the Biden administration’s push for stablecoins. In his view, if digital currencies are the future, that future should be led by central banks, not private firms like Tether or Circle.

What does this mean for the crypto industry?

If Warsh accelerates the US development of a digital dollar, the space for stablecoins could be squeezed. Regulators might require issuers to hold more reserves, undergo stricter audits, or limit their use cases.

But it could also have an unintended consequence: as stablecoins face pressure, investors might turn to decentralized alternatives—including Bitcoin itself. After all, Bitcoin requires no issuer’s credit backing and isn’t under any single country’s regulation.

In this sense, Warsh’s support for CBDCs could indirectly strengthen Bitcoin’s position as a “decentralized store of value.”

The Senate Roadblock: An Unfinished Political Game

Warsh’s nomination still faces political hurdles.

Senator Thom Tillis publicly stated he would oppose any Fed nominee until the Department of Justice fully resolves its investigation into Powell: including Warsh. Senate Majority Leader John Thune acknowledged that without Tillis’s support, Warsh “may not” be confirmed.

The outcome of this political game will determine whether Warsh can smoothly succeed Powell when his term ends in May.

If confirmation is delayed, the Fed will enter a leadership vacuum. This would significantly increase market uncertainty. Investors won’t know who will cast the key vote on the next rate decision or how Fed policy might evolve.

For crypto, this uncertainty could be a double-edged sword. On one hand, policy vacuum often increases volatility, which can be deadly for leveraged traders. On the other hand, when traditional financial systems are in chaos, Bitcoin’s “safe haven” narrative often gains more attention.

The Outline of a New Order

Trump’s choice of Warsh is a gamble on a new monetary policy paradigm.

The core assumption: AI-driven productivity revolution can enable economic growth in a low-interest environment without triggering inflation. The Fed can cut rates to support the real economy while shrinking the balance sheet to correct market distortions. Under this framework, Bitcoin isn’t a replacement for money but a “good policeman of monetary policy”—an external constraint reminding central banks to stay disciplined.

It’s an ambitious vision, but also a risky experiment.

If successful, Warsh could pioneer a new central banking management model, proving that technological progress can break the traditional inflation-growth trade-off. If it fails, he risks repeating the 1970s, with runaway inflation and a loss of liquidity support for markets.

For crypto investors, this means rethinking investment logic. Over the past decade, “Fed printing = Bitcoin rising” has been a simple, effective equation. In the Warsh era, that equation may no longer hold.

Instead, a more complex calculus emerges: liquidity tightening will suppress speculative demand, but restored monetary discipline could reinforce Bitcoin’s store-of-value narrative. Short-term negative, long-term positive? Or both?

No one knows the answer. But one thing is certain: when someone who called software “not money” is about to control the world’s most important central bank, the game rules are being rewritten.

History doesn’t simply repeat, but it rhymes. Crypto investors in 2026 may need to learn a new rhythm.