Kevin Warsh’s Fed confirmation faces tough tests in World Economy News 21/04/2026 The Federal Reserve has entered its quiet period ahead of the 29 April FOMC meeting, but it will still be drawing headlines given Kevin Warsh’s confirmation hearing to become Federal Reserve Chair is being held tomorrow. Once viewed as a hawk when he previously served as a Fed Governor (February 2006-March 2011), he has been nominated by President Trump, who has demanded much lower interest rates from current incumbent, Jerome Powell. Warsh will inevitably be questioned on how closely aligned he is with the President’s thinking. We imagine he will indicate a belief that, over time, lower interest rates make sense. However, preserving market credibility is of paramount importance and there must be justification. The Iran conflict-induced jump in motor fuel costs creates near-term challenges in an environment where both core and headline consumer price inflation have exceeded the 2% target throughout the past five years. He will be wary of coming across as too dovish. That could heighten market fears of potential unanchored market inflation expectations, prompting higher long-term borrowing costs. Treasury Secretary Scott Bessent has emphasised that, in his view, the most important metric is the 10Y Treasury yield given its benchmark role and the impact it has on mortgage rates and corporate borrowing costs. He appears to be onboard with a delay to rate cuts, based on recent media comments, but the President is probably not going to be so keen. Nonetheless, if there is a swift conclusion to the conflict and fuel prices drop sharply, Warsh will strongly suggest there is the possibility of his support for rate cuts later this year. Structurally speaking, Kevin Warsh will emphasise the opportunity for lower borrowing costs over the medium to longer term. He clearly buys into the idea that tech/AI investment will boost productivity and allow the US to grow faster without generating inflation. To be fair, there appears to be support for this view within the broader Fed, given that within the March forecast update, officials revised higher their long-run GDP forecast to 2% from 1.8%, without altering the long-term inflation prediction. The minutes suggested that “several participants… expected higher productivity growth, associated with technological or deregulatory developments, to put downward pressure on inflation.” The Fed’s balance sheet In addition to the productivity narrative, Kevin Warsh has another theory. Every US$1tn of Fed bond holdings equates to 50bp on the policy rate (approximately). In consequence, balance sheet contraction, through bond roll-offs or outright selling, facilitates rate cuts. This is convenient, as Warsh also believes that the Fed continues to own too many bonds. The build of bond buying was a consequence of past crises, and now that they are no more, much of the bonds should be off-loaded. He’s not been specific about sizes, but said that they should be significantly reduced. And he’s identified Mortgage-Backed Securities (MBS) as a particular eye-sore that should be liquidated. And finally, he’s advocated mostly a passive run-off, cognisant of market de-stabilisation risks. Consider two scenarios. One is a reduction in the balance sheet right back to pre-Global Financial Crisis levels (5.5% of GDP). That would require some US$4.5tn in bond liquidations. That’s unlikely, but we do develop that narrative here. More probable is a ta