Meet the New Boss

Nothing like the old boss, or the two before that.

The nomination of Kevin Warsh was a crucial second step in stabilizing federal debt and ending the Federal Reserve’s balance sheet malinvestment, the first was Treasury Secretary Bessent’s appointment. Our 2026 Outlook: Duration Tightening, is on track. New Fed Chair tend to get tested, a pullback in equities and Treasuries is increasingly likely, but this was an important appointment that is likely to have positive longer-run implications for productivity, growth, and the wealth of the nation.

• Focus on rates misses the real story: Media and investors fixated on hawk/dove rate policy, while ignoring the crucial issues—Fed balance sheet policy and bank regulation—especially Treasury Secretary Bessent’s plan to unwind the Fed’s long-term “mission creep.”

• Kevin Warsh chosen to reverse QE-era excesses: Warsh was selected because of his long-standing criticism of large-scale asset purchases and debt monetization, aligning with an agenda to “privatize” the Fed’s balance sheet and roll back financial statism.

• Privatizing the Fed balance sheet is central to debt stability: Ending duration easing and shrinking the Fed’s asset and liability sides would shift government debt back to private holders, restoring market discipline on fiscal spending and reducing financial repression.

• Monetary policy has been overshadowed by fiscal policy: Fiscal expansion—not Fed rate policy—has driven this cycle’s outcomes, explaining why tightening didn’t cause a recession and why balance sheet normalization matters more than incremental rate moves. Aggressive duration easing, followed by aggressive rate hiking and passive balance sheet reduction is the primary cause of the K-shaped business, banking and household sectors.

• Global trade shifts reinforce disinflationary forces: Tariffs are an adverse demand shock, the US trade deficit may be entering a secular decline, China remains the marginal exporter of deflation, and an eventual (managed) dollar decline is seen as inevitable but risky if disorderly.