Why Warsh is starting to bite back

 Financial Times UK 12 Sep 2026 Gil lian Tett gil lian.tett@ft.com

 Is Kevin Warsh a cred ible eco nom ist? That is a ques tion many investors posed when US Pres id ent Don ald Trump nom in ated him as Fed eral Reserve chair. And while naysay ers warned about “a dis aster in the mak ing”, Warsh’s recent speech in Jack son Hole, in which he pledged to fight infla tion, has sparked cau tious praise from some former crit ics. But the really cru cial ques tion now, ahead of Wed nes day’s key Fed meet ing, is whether Warsh is a good polit ical strategist. For his chal lenge is not “just” the eco nomy but the capri cious polit ical threats from the White House. I have known Warsh for many years, and he has always expressed strong free market ideals. Thus, he detests infla tion and gov ern ment med dling — and (like me) hated the over use of quant it at ive eas ing by the Fed after the 2008 crisis. But Trump is the oppos ite: he loves mar ket med dling if it boosts his power, is demand ing lower interest rates and will prob ably pres sure the Fed to buy more bonds if Treas ury prices keep slid ing, after 10-year bond yields moved towards 5 per cent last week. Fig ures like Demo cratic Sen ator Eliza beth War ren have thus assumed that if there is a dir ect polit ical clash, Warsh will capit u late to keep his job. “Hav ing proven him self to be Don ald Trump’s sock pup pet . . . [his] cred ib il ity is in tat ters,” she declared this spring. But now that “sock pup pet” is bit ing back. 

And there are at least five reas ons why this may con tinue, since Warsh now has more polit ical lever age — and skill — than many earlier feared. The first relates to Jerome Pow ell, his pre de cessor. When Pow ell stepped down as Fed chair in May, he took the highly unusual decision to remain on the Fed board and told friends he would stay there until Trump con clus ively dropped threats to pro sec ute him. Many Fed-watch ers thought Warsh would hate this. Not so. As chair, Pow ell was Trump’s favour ite whip ping boy for any eco nomic woes, and his con tin ued involve ment means that Trump’s aco lytes are in a minor ity on the board. The unplanned con sequence is that Warsh can blame any thing that riles the pres id ent on him. 

The Fed board is now oper at ing in an unusu ally demo cratic man ner, with “fam ily fights”, as Warsh has said. A second factor is rising bond yields. This presents a nasty head ache for US Treas ury sec ret ary Scott Bes sent, who must sell over $10tn of Treas ur ies in the next year. Hence his bid last week to cap yields with a $6bn bond buy back pro gramme — that failed. But “unlike Bes sent . . . Warsh does not seem too bothered by rising bond yields,” as Gavekal Research told cli ents this week. No won der: rising yields will help Warsh reduce infla tion, even without rate hikes, sug gest ing the era of sec u lar stag na tion is over — as he said in Jack son Hole. Of course, this cre ates another risk: investors may panic if Warsh and Bes sent are vis ibly on a policy-col li sion course. And that con cern has been stoked by a recent Wall Street Journal column from Stan ley Druck en miller, Warsh’s former boss and ideo lo gical ally, that urged Bes sent to “let the bond mar ket speak” without med dling.

 But nobody should for get that Warsh and Bes sent are both protégés of Druck en miller. They sup por ted each other’s bids for their cur rent jobs and will col lab or ate to pre vent a fin an cial crunch. As Bes sent flails, however, it makes Warsh look more power ful by default. A fourth issue is the bal ance sheet. Trump, like all real estate play ers, is obsessed with interest rates. But he seems com pletely unin ter ested in the Fed’s com plex mon et ary policy mech an isms, and has never ran ted — yet — about the fact that the Fed is now redu cing its hold ings of long-term secur it ies to the tune of around $19bn a month (which, as Gavekal notes, is more than Bes sent’s buy backs).

 This gives Warsh another tool to tighten fin an cial con di tions (he has tasked an external com mit tee with ideas, which reports later this year). Then there is a fifth point: tim ing. Opin ion polls show that US voters increas ingly dis ap prove of Trump, partly due to his Iran war. Hence his des per ate gam bit to offer every adult cit izen a $5,000 dividend if Repub lic ans win the Novem ber midterms, lead ing crit ics to mut ter about “peak Trump”. In real ity, such chat ter still looks pre ma ture ahead of the midterm elec tions. But investors are already less wary of Trump’s melo dra mas or the dra matic state ments from Bes sent; after all, yields rose after his announce ment of buy backs. That gives Warsh more abil ity to dis play inde pend ence. So does that mean the Fed board will actu ally hike on Wed nes day? Although pre dic tion plat form Poly mar ket gives over a 50 per cent prob ab il ity to that, I per son ally sus pect the board will wait until after the midterms. But the key point is this: the odds show how the polit ical cal cu la tion around the Fed has changed. Warsh is dis play ing some stra tegic skills and polit ical wings. Let us hope he can keep these — espe cially if (or when) those rising bond yields cre ate pres sure for quant it at ive eas ing.