Markets and Economy Three takeaways from Kevin Warsh’s Fed Chair hearings

This week, I’m going to take a brief break from talking about the conflict with Iran. Not because it lacks importance, but because it appears to be of fleeting interest to financial markets. Stocks hit all-time highs midweek and closed the week near those levels.¹ Bond yields have generally been range-bound.² Credit spreads have barely moved.³ The US dollar has generally weakened through April.⁴ In short, markets appeared to believe that the worst of the conflict is behind us and that conditions will improve over time.

At the same time, the economic data demonstrated resilience. Global manufacturing Purchasing Manager’s Index (PMI) readings, in the US and UK, remain strong and consistent with expansion.⁵ US retail sales surprised to the upside,⁶ reinforcing the view that the consumer remains engaged despite elevated gasoline prices.⁷ If markets are a forward-looking-discounting mechanism, they appear to be telling us that geopolitics is no longer the dominant variable and that the economic backdrop remains workable.

Instead, I want to focus this week on something that I believe will matter far more to the US economy and markets over the medium to longer term. That’s the leadership transition at the Federal Reserve (Fed). The fact that Kevin Warsh is emerging as the next chairman is noteworthy on several levels. Here are my three key takeaways from his testimony to Congress last week.

1. Importance of Fed independence 

There’s concern about Fed independence and the fear that Warsh may be placed at the Fed to do the president’s bidding. In his testimony, Warsh emphasized the importance of Fed independence and suggested an intention to navigate policy choices without unnecessarily provoking the administration.⁸

Whether that balance can be maintained over time remains an open question, but for now, investors appeared to be willing to give him the benefit of the doubt. Longer-term US inflation expectations remain well-contained,⁹ suggesting that markets aren’t currently pricing in concerns about political interference in monetary policy.

2. More nuanced interpretation of inflation

Warsh’s tone is increasingly dovish compared to his first go-round at the Fed as a member of the Board of Governors. Back then, he was (inexplicably?) more hawkish in the aftermath of the Global Financial Crisis. What stood out most to me during last week’s hearings was his openness to a more nuanced interpretation of inflation, especially in an environment shaped by artificial intelligence (AI)-driven productivity gains, tariffs, and oil-related shocks.

Warsh’s support of inflation measures such as median inflation, which focuses on the middle observation, and trimmed mean inflation, which excludes extreme moves on both ends, may look to some like moving the goalposts. But in the current environment, they likely make more sense, in my view. The Fed shouldn’t be setting policy based on temporary price spikes driven by tariffs, war, or supply disruptions. These alternative measures are explicitly designed to look through those shocks and better capture underlying inflation trends.

In practice, this may not represent a dramatic break from how Chair Powell approached tariffs and geopolitical risks, but Warsh appeared more willing to formalize that framework by broadening the set of inflation indicators policymakers emphasize.

3. Reducing the size of the Fed’s balance sheet — slowly

Balance sheet policy is the area where he sounded more hawkish at first, but there’s an important nuance. Warsh signaled an interest in reducing the size of the Fed’s balance sheet, while being explicit that it isn’t something that can or should happen quickly. He acknowledged that it took decades to build the balance sheet and that unwinding it will require time, patience, and care.

Just as important, any changes to balance sheet policy will require agreement across the Federal Open Market Committee (FOMC), reinforcing that this would be a deliberate and collective process rather than a unilateral shift in policy.

Bottom line

The upshot is that what I heard was broadly dovish, pragmatic, and respectful of institutional independence. Markets generally seemed to agree. I view this combination as supportive of stocks, and it reinforces my longstanding inclination not to fight the Fed.