Opening
Kevin Warsh will be sworn in as chairman of the Federal Reserve on May 22 (Friday), according to multiple U.S. media outlets cited by Xinhua on May 19. A White House official confirmed that U.S. President Trump will hold an inauguration ceremony for Warsh at the White House. The 56-year-old Warsh returns to the Federal Reserve after a 15-year absence, succeeding Jerome Powell. Warsh previously served as a Federal Reserve governor from 2006 to 2011, when he resigned over his opposition to the second round of quantitative easing (QE2). Since then, he has frequently appeared in public as a critic of the Federal Reserve, particularly intensifying his criticism of Powell's monetary policy in recent months. Warsh has stated his intent to "reshape the Federal Reserve," signaling potential shifts in the institution's policy direction and operational focus.
## Monetary Policy: Balance Sheet Reduction and Rate Cuts
Warsh has proposed a combination of balance sheet reduction (quantitative tightening) and interest rate cuts as core elements of his monetary policy approach.
Warsh views inflation as a monetary phenomenon—the result of excessive money supply—and holds the Federal Reserve responsible for price stability. He has criticized former Chair Powell for misjudging conditions in 2021 and 2022, when Powell initially characterized inflation as temporary despite U.S. inflation reaching a 40-year high and remaining above the Federal Reserve's 2% target.
On quantitative easing, Warsh has expressed skepticism and criticism of QE2 and subsequent rounds. He stated that while quantitative easing was a "necessary evil" during the financial crisis, the central bank should have begun unwinding its balance sheet once the crisis ended. Without such action, Federal Reserve balance sheet expansion only distorts markets, drives federal spending increases, and pushes U.S. fiscal policy onto a dangerous trajectory. The Federal Reserve's balance sheet currently stands at approximately $7 trillion.
Balance sheet reduction—a core element of Warsh's monetary policy—would involve recovering dollars and help control inflation, though it could pressure the U.S. Treasury market.
The second pillar of Warsh's monetary policy is interest rate cuts. Balance sheet reduction and rate cuts represent opposite policy directions: contraction versus accommodation. Warsh has stated that productivity gains from artificial intelligence could suppress goods and services prices, creating room for the Federal Reserve to cut rates.
However, the "balance sheet reduction plus rate cuts" combination faces significant headwinds. Current U.S. inflation remains elevated: April CPI rose 3.8% year-over-year, exceeding market expectations of 3.7% and marking the highest level since May 2023, according to U.S. Bureau of Labor Statistics data. Core CPI rose 2.8% year-over-year, surpassing the expected 2.7% and hitting its highest level since September 2025. These figures create substantial resistance to rate cuts.
Additionally, the U.S. Treasury market is sending unfavorable signals. The 10-year Treasury yield has recently reached 4.6%, a one-year high. Rising Treasury yields correspond to falling Treasury prices, which may reflect market expectations that inflation will persist longer or represent an advance reaction to Warsh's anticipated balance sheet reduction policy. Overall, Treasury market conditions may impede near-term implementation of Warsh's policy combination.
## Fed Functions: Focus on Core Monetary Policy Mandate
Warsh believes the Federal Reserve should concentrate on its core monetary policy function and avoid overreach into areas beyond its mandate.
Warsh contends that Federal Reserve mission creep has drawn the institution into political territory, undermining its independence. He has characterized the expansion of Federal Reserve functions as the institution having "lost its way."
Warsh has stated that the Federal Reserve must respect its jurisdictional boundaries. Once it ventures into fiscal and social policy domains where it lacks authorization and expertise, its independence faces maximum risk. The Federal Reserve should not serve as an all-purpose agency of the U.S. government or overstep into matters that should be debated and decided by other branches.
In congressional testimony, Warsh stated: "The more the Federal Reserve comments on issues outside its mandate, the harder it becomes to ensure price stability and full employment, and the more politically vulnerable it becomes. The Federal Reserve's expanding tendency signals that it faces an 'existential risk.'" Warsh has also expressed dissatisfaction with forward guidance, the communication tool that has dominated Federal Reserve policy messaging for over a decade. He does not favor numerous Federal Reserve officials publicly predicting interest rate trajectories.
## Independence: Monetary Policy Independence Priority
Warsh views Federal Reserve independence as the foundation of its credibility.
Warsh distinguishes between varying degrees of independence across different Federal Reserve functions. He believes the Federal Reserve possesses the highest degree of independence in monetary policy, and that monetary policy independence is essential. In congressional testimony, he stated he would not follow President Trump's directives on interest rate policy. However, Warsh contends that the Federal Reserve should not enjoy the same independence in other domains—managing public funds, bank supervision policy, and international financial affairs—as it does in monetary policy.
## Next Steps
The Federal Reserve's next policy meeting will be held June 17–18. This will be Warsh's first meeting as chair, where he will discuss policy decisions alongside remaining governors, including former Chair Powell.
