（Singapore, 02.02.2026）Financial markets wasted little time recalibrating after US President Donald Trump settled on Kevin Warsh as his choice to succeed Jerome Powell as chair of the Federal Reserve. For months, investors had been fixated on one simple question: would Trump’s pick slash interest rates quickly and aggressively?
Warsh’s return has upended that narrative.
Instead of debating near-term rate cuts, markets are now grappling with something far bigger and more structural — the Fed’s $6.6 trillion balance sheet and how deeply the central bank should be involved in shaping financial markets. Warsh is widely known not just as a former Fed governor, but as one of the institution’s sharpest internal critics, particularly when it comes to large-scale bond buying.
That reputation showed up fast in market prices. On Friday, longer-term Treasury yields climbed, the US dollar jumped and gold and silver slid, reflecting growing expectations that a Warsh-led Fed could move more decisively to shrink its asset holdings. Investors began reassessing the era of abundant liquidity that has defined markets since the global financial crisis.
Warsh has repeatedly argued that years of quantitative easing — the Fed’s practice of buying Treasuries and other securities — went too far, keeping borrowing costs artificially low and encouraging excessive risk-taking. While he initially supported QE during the 2008 crisis, he later broke with colleagues as the balance sheet kept expanding, eventually resigning from the Fed in 2011.
Now, with his nomination, those long-held views are no longer theoretical. They are shaping expectations for how monetary policy might look in the years ahead.
A Smaller Fed, With Big Market Consequences
At the heart of the debate, whether Warsh would push to meaningfully shrink the Fed’s footprint in markets — and how quickly. The central bank’s asset pile ballooned during successive crises, first to stabilize markets after 2008 and later to cushion the economic shock of the Covid-19 pandemic. The result is a balance sheet that dwarfs anything seen during Warsh’s previous tenure.
Warsh has warned that such scale creates what he calls “monetary dominance,” where markets and governments grow dependent on central-bank support. In his view, prolonged bond buying not only distorted prices but also made it easier for lawmakers to run up debt, knowing the Fed was standing by.
His preferred fix sounds simple in theory: let the balance sheet run down, reduce reliance on money printing and allow fiscal authorities to take clearer responsibility for government borrowing. In practice, it is anything but simple.
Shrinking the balance sheet tends to push long-term yields higher, tightening financial conditions. That could clash with the Trump administration’s desire to keep borrowing costs low, particularly for housing and government debt. In January, Trump even directed Fannie Mae and Freddie Mac to purchase $200 billion of mortgage-backed securities to help cap home-loan rates — a sign of how politically sensitive long-term yields have become.
Some argue Warsh could offset that tightening by cutting short-term interest rates more deeply. Others are skeptical, noting that markets don’t always respond neatly to such trade-offs. A sharp reduction in Fed liquidity could force the Treasury or other agencies to play a larger role in managing markets, at a time when US borrowing needs are already surging and national debt exceeds $30 trillion.
Money markets are another pressure point. Even modest reductions in reserves have triggered disruptions in the past, most notably in 2019, when short-term funding rates spiked and forced the Fed to intervene. More recently, late-2025 strains prompted the central bank to halt its balance sheet runoff and resume buying short-term Treasury bills to stabilize conditions.
That experience underscores how sensitive the system has become to changes in liquidity. Banks now operate under an “ample reserves” framework, holding large buffers to meet regulatory and internal requirements. A return to scarcer reserves could increase volatility and force the Fed back into markets — the opposite of what Warsh has argued for.
Dollar Whiplash and a Market on Alert
Currency traders also felt the impact of Warsh’s nomination. In the days before the announcement, investors had piled into bets against the US dollar, reflecting concerns over policy uncertainty, rising deficits and Trump’s unpredictable approach to trade and geopolitics.
Those positions were quickly challenged. News of Warsh’s selection triggered the dollar’s biggest one-day gain since May, catching bearish traders off guard. Precious metals fell, while Treasury yields climbed — classic signs that markets viewed Warsh as more hawkish than feared.
Still, few are calling it a turning point for the currency. Despite the rebound, the dollar remains down for the year after a steep decline in 2025, and many strategists continue to expect further weakness. They argue that large fiscal deficits, political risk and shifting global capital flows will weigh on the greenback over time, even if near-term swings remain sharp.
For now, markets are in a holding pattern. Warsh is just one vote on the Federal Open Market Committee, and any major shift would require consensus among policymakers, many of whom still support maintaining ample liquidity in the system. Analysts also note that a truly smaller balance sheet may require changes to bank regulations — a complex and politically sensitive task.
Even so, investors are paying close attention. Warsh’s nomination has reopened a debate that many thoughts were settled: how big the Fed should be, how active it should remain, and whether the post-crisis model of abundant liquidity is sustainable.
Until those questions are answered, traders know one thing for sure — the era of easy assumptions about the Fed’s role in markets is over.
