New Sheriff In Town
The Credit Strategist - February 2026
Kevin Warsh is an excellent choice to serve as the next Chairman of the Federal Reserve. He was a candidate for the position in 2017 but then President Trump appointed Jerome Powell instead, reportedly on the advice of then Treasury Secretary Steven Mnuchin. That appointment was a mistake. Mr. Warsh described the negative consequences of Fed policy under Powell and his predecessors in a March 20, 2023 editorial in The Wall Street Journal (“The U.S. Needs Economic Regime Change”):
“The misallocation of capital – goosing the price of the riskiest and least-productive of assets – set the conditions for boom and bust. The financing of the ‘big state’ set the country on an unsustainable fiscal trajectory. The extraordinarily loose financial conditions created herd behavior among market participants and firms and complacency among policy makers, including regulators. The surge in inflation substantially raised the cost of living for citizens and undermined business planning.”
Mr. Warsh’s diagnosis of the Fed’s errors was dead-on. Further, he possesses the temperament, experience, and intelligence to navigate the complex challenges facing U.S. monetary policy in a period of unsustainable deficits and financial dominance. Policy must change to avoid a reckoning that will damage markets and the economy. No doubt Mr. Warsh benefitted enormously from working with Stanley Druckenmiller, one of the best minds in the markets, over the last decade, as well as from his prior experience as a Fed governor during the Great Financial Crisis. By appointing Mr. Warsh instead of Kevin Hassett, the president wisely chose competence over the perception (valid or not) of blind loyalty. Mr. Trump may have limited his options with the ill-advised criminal investigation of current Fed Chair Jerome Powell (which should be dropped) and the failure to reign in ICE’s tactics, both of which increased the need for a nominee free of political taint (I give little weight to claims that Mr. Warsh’s was due to his relationship with the Lauder family, large Republican donors). Mr. Warsh laid out a bold and compelling vision for reforming a central bank desperately in need of change and stood out among a highly qualified group of candidates for the job. The other candidates, including Mr. Hassett, would have been excellent choices but Mr. Warsh was the best choice. Hopefully he will be confirmed without too much unnecessary political drama though that is probably too much to hope for (the lack of drama) in the current hothouse atmosphere in Washington.
The Fed wisely kept interest rates unchanged at its late January meeting. Even the two dissenters, Christopher Waller (who was a strong candidate for chair) and Stephen Miran (whose temporary appointment ends on January 31st), only wanted a 25-point cut, which in Miran’s case was unusual because he pushed for 50-basis point cuts at every meeting. Mr. Waller argued that rates should be cut by 50-75 basis points to a 3% neutral rate and Mr. Miran wants even lower rates but neither pushed for that at the January meeting. With stocks trading at record levels, inflation treading above target, the job market stabilizing, and credit spreads sitting at or near record tights, there is little argument apart from fiscal dominance (lowering the cost of servicing the federal deficit) supporting lower rates. And with overt political interference including an ill-advised criminal investigation of Mr. Powell, it was incumbent upon the Fed to show independence and resist purely political calls to lower rates at this time. Rates markets barely reacted, suggesting they anticipated the Fed would stand pat (though stocks and precious metals reacted negatively – see more below). Rates markets are now pricing in little easing for the rest of 2026 and even 2027, but the consensus still argues that the “neutral” rate is 3% (I think it’s higher) which suggests that rates will eventually be lowered to that level (while President Trump still calls for 1% which would be, with all due respect, a terrible policy error). Mr. Powell also confirmed that nobody on the policy committee is thinking about raising rates at this time so hopefully we can snooze until Mr. Warsh takes over.
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