Everyone says that Wash "Eagle" is consolidating his position, so what will he actually do? Read on to find out!

During most of the time when President Trump was considering the next candidate for the Chairman of the Federal Reserve, the market debate focused on whether the "Powell successor" chosen by Trump would significantly cut interest rates as he hoped. Now, with Trump officially nominating former Federal Reserve Board Governor Kevin Warsh - an economist known for his harsh criticism of the central bank and its monetary policy views - the debate has suddenly shifted from short-term interest rates to the Federal Reserve's $6.6 trillion balance sheet and its core role in the market. Over the years, Warsh has repeatedly criticized Federal Reserve officials for allowing the central bank's assets to expand, sparking speculation in the market that once he takes office, he may quickly take action to shrink the balance sheet. These rumors and expectations have pushed up long-term bond yields last Friday, while also causing a significant rebound in the dollar and a steep decline in gold and silver prices. As Zach Griffiths, Managing Director of Investment Grade and Macro Strategy at CreditSights, said, "He (Warsh) has always taken a tough stance on the Federal Reserve's balance sheet expansion." So, if Warsh does succeed in taking office this summer - taking over as Federal Reserve Chairman from Powell - how might he achieve his policy objectives? What changes might occur in the responsibilities between the Federal Reserve and the US government (mainly the Treasury Department), as well as the direction of long-term interest rates in the United States? "Cooperation" between the Federal Reserve and the Treasury Department First, Warsh's views on some of the Federal Reserve's overreach are consistent with US Treasury Secretary Scott Bernt's, and Warsh hopes to completely reverse this trend and promote other reforms. However, this move is also likely to face a tricky situation - its direct impact not only involves long-term interest rates but also affects the key markets that major financial institutions around the world rely on for their day-to-day lending activities. To a large extent, if Federal Reserve policymakers approve further balance sheet shrinking policies, their market impact may lead to Warsh's Federal Reserve diverging from the government's goal of reducing long-term borrowing costs. This would force US institutions such as the Treasury Department to increase market intervention - as government borrowing needs continue to rise, and US debt has exceeded $30 trillion, this task will become even more challenging. It is worth noting that in January of this year, Trump ordered government-sponsored enterprises Fannie Mae and Freddie Mac to buy $200 billion in mortgage-backed securities to help control the cost for potential homebuyers, which has already helped alleviate some of the central bank's burden. Greg Peters, Co-Chief Investment Officer of Fixed Income at PGIM and a member of the US Treasury Borrowing Advisory Committee, pointed out, "If Warsh persists in opposing lowering yields by expanding the balance sheet, it means that the US Treasury Department will take on more responsibility." In an interview last year, Warsh cited the 1951 US Treasury-Federal Reserve Agreement that established central bank independence, advocating for redefining the relationship between the two. Warsh said, "We need a new US Treasury-Federal Reserve Agreement, just like in 1951 - when national debt accumulated, we found ourselves in a situation where the central bank and the Treasury were at odds with their goals." He emphasized that under the new agreement framework, "the Federal Reserve Chairman and the Treasury Secretary can clearly and prudently explain to the market: 'This is our target for the size of the Federal Reserve balance sheet.'" Shrinking the balance sheet may actually release room for rate cuts? In terms of monetary policy trade-offs, Warsh may also argue that by tightening financial conditions, reducing the balance sheet could create more room for the Federal Reserve to make larger cuts to benchmark interest rates. "In theory, if the Federal Reserve reduces its balance sheet based on the principle of 'minimizing intervention in the economy,' it can offset the impact of balance sheet operations by adjusting short-term rates," said Stephen Moore, a Federal Reserve Governor appointed by Trump, last Friday. "If this action (shrinking the balance sheet) leads to an increase in long-term rates, it can offset the tightening of financial conditions by lowering short-term rates." Looking back at his career, Warsh was an early advocate of the Federal Reserve's quantitative easing (QE) - bond buying program during his time at the Federal Reserve from 2006 to 2011. However, as time passed, he gradually became a fierce critic of the policy, ultimately resigning due to the central bank's continued bond purchases. Since taking emergency actions after the global financial crisis and continuing during the COVID-19 pandemic, the Federal Reserve has accumulated a substantial amount of US Treasury bonds and other debts in its efforts to support the economy, stabilize markets, and control borrowing costs. In recent speeches and interviews, Warsh has repeatedly pointed out that the aggressive bond-buying policies have gone too far and artificially suppressed long-term borrowing rates. This, in turn, has fueled risky behavior on Wall Street and encouraged lawmakers to keep increasing debt, leading to what he calls "monetary dominance" - financial markets overly reliant on central bank support. He proposed a solution in an interview last July: "My simplified version is: print less money. Reduce the balance sheet. Let Treasury Secretary Bernt handle the fiscal accounts so that substantial rate cuts can be achieved." Kevin Hassett, Trump's Chief Economic Advisor, also said on Sunday that the Federal Reserve should focus on making its balance sheet "as lean as possible." Hassett said that Kevin Warsh, Trump's nominee for Federal Reserve Chairman, is the "right person at the right time." The Federal Reserve should focus on its responsibilities, namely maintaining financial stability, lowering rates, reducing unemployment, and lowering inflation. The Federal Reserve should do this in a "old-fashioned, low-key way." Easier said than done Of course, shrinking the footprint of the Federal Reserve is not an easy task. If approved, Warsh will face a balance sheet several orders of magnitude larger than when he last served on the central bank. The money markets are particularly sensitive to small changes in the liquidity volume in the system. 2019 was a typical example, where the Federal Reserve had to intervene to ease funding pressures that led to a surge in short-term borrowing rates. A more recent example is at the end of 2025 when government borrowing increased and the Federal Reserve continued to reduce its holdings - that is, quantitative tightening (QT) - withdrawing funds from the money market, causing a small but significant funding squeeze. Soon after, the Federal Reserve suddenly announced the end of QT and instead began injecting reserves back into the financial system by purchasing short-term Treasury bills maturing within a year. The Federal Reserve started buying around $40 billion of Treasury securities per month in December last year to ease the pressure of rising short-term rates. Gennadiy Goldberg, Director of US Rate Strategy at TD Securities, said, "Although current policy remains unchanged, the market will remain nervous until Warsh further clarifies his views." This article is reproduced from "Caishen News," author: Xiaoxiang; GMTEight Editor: Feng Qiuyi.