Introduction

Recently, with Trump's formal nomination of Kevin Warsh as the next Federal Reserve Chairman, the market reacted sharply: spot gold recorded its largest single-day drop since 1983, quickly breaking through the $5,000 mark, with a maximum drop of over 10%; silver's drop even exceeded 30% at one point.

Bitcoin fell from a high of nearly $100,000 within 48 hours, breaking through multiple psychological support levels and dropping to the $70,000 range, a pullback of nearly 30%. The Nasdaq 100 index also saw a significant weekly decline amid expectations of both a rising discount rate and quantitative tightening. The changing expectations of a change in Federal Reserve leadership and Warsh's "interest rate cuts + quantitative tightening" measures seem to herald a fundamental shift in the Fed from "lender of last resort" to "liquidity gatekeeper." However, what truly determines the direction of global assets is not what Warsh "wants to do," but what he can do and to what extent. This report starts with Warsh's policy preferences and resume, systematically reviews the political environment he faced, his policy propositions, and deduces the policy rhythm in the two stages before and after the midterm elections. It ultimately focuses on the repricing logic of various global assets and the transmission of the impact on the A-share market. It also attempts to understand how to interpret the real impact of the Fed's policy shift on the capital market in the Warsh era. Warsh's Balance Sheet Reduction + Interest Rate Cuts: Using Balance Sheet Reduction to Control Inflation, Using Interest Rate Cuts to Control Financing Compared to Hassett, Trump's appointment of Warsh as the new Federal Reserve Chairman significantly revised market expectations that the Fed would be more accommodative than anticipated. The market saw a noticeable adjustment after Warsh's nomination. This is because the market is accustomed to labeling Federal Reserve officials using a "hawkish/dovish" dichotomy, but a more accurate assessment is that Warsh is a "disciplined" individual—more concerned with the boundaries of the central bank, the long-term consequences of financial conditions, and the institutional costs of balance sheet expansion, and naturally averse to the "normalization of unconventional tools" such as QE.

Focusing on Warsh's policy proposals:First, Warsh dislikes quantitative easing (QE), but not because of "opposing easing" itself.Warsh believes that QE distorts asset prices, inflates bubbles, and exacerbates the wealth gap between wage earners and asset holders. For example, he does not deny the necessity of QE1 during the 2008 financial crisis, viewing it as an "innovation in crisis response," but explicitly opposes QE2 and subsequent operations—the problem is not that this tool was used during the crisis, but that crisis tools have been treated as readily available, routine options. This means that in the future, the threshold for the Fed to launch QE in the face of general economic fluctuations will be significantly raised. Secondly, Warsh does not deny the necessity of interest rate cuts, but emphasizes that "interest rate cuts are not equivalent to quantitative easing." Warsh recently stated that the current interest rate level may be 50-100 basis points higher than the neutral rate, which is around 3%, close to Powell's previous estimate and lower than Hassett's estimate of 2.5% or lower. This relatively restrained expectation of interest rate cuts actually enhances the credibility of his policy—interest rate cuts are based on a technical assessment of the neutral interest rate, rather than a simple compromise to political pressure. However, the key point is that he advocates using quantitative tightening to create room for interest rate cuts: he believes the root cause of inflation is not an overheated labor market, but rather the excessive money supply resulting from the expansion of fiscal deficits coupled with the Fed's QE. Therefore, the correct way to control inflation is not to suppress private sector demand by raising interest rates, but to limit the fiscal attributes of money issuance through quantitative tightening. This is the theoretical basis for the "interest rate cut + quantitative tightening" combination that the market is worried about. Third, Warsh is seen by the market as a reformist whose core proposition is to shrink the limits of the Fed's power. Warsh repeatedly questioned, "Has the Fed done too much that a central bank shouldn't be doing?" This awareness of boundaries means that the threshold for Fed intervention will be raised during financial market turmoil. Over the past fifteen years, the Fed has gradually evolved from a simple monetary policy maker into the market's ultimate buyer, a shadow ally of the treasury, and the ultimate guarantor of banks. What Warsh is trying to reverse is the boundary of the Fed's ultimate guarantor role. This may be the biggest difference between his and Powell's decision-making motivations. Powell's defining characteristic is his flexible reliance on employment and inflation data for expectation and risk management, with his core decision-making focus on "how to avoid systemic shocks." This flexibility allows him to quickly adjust monetary policy—rapidly shifting course after the market crash in the fourth quarter of 2018, launching an unprecedented package of market-rescue measures in March 2020, and cutting interest rates by 50 basis points in a single instance in September 2024 based on employment data. This flexibility makes Powell one of the few Fed chairs in history to have come close to a "soft landing," but it also makes the Fed's policy framework increasingly reliant on immediate responses to short-term data. Walsh's starting point, however, is entirely different: he is more concerned with "whether this is something the central bank should be doing." In his view, the central bank's responsibility is to adjust monetary conditions through price-based tools (interest rates), rather than directly intervening in the asset market or undertaking fiscal financing functions through quantitative tools (QE/asset purchases). The Federal Reserve's liability structure: From "Cash-driven" to "Reserve-dependent" Data source: FRED, Zhongtai Securities Research Institute. Specifically, Warsh criticized the Fed's current "ample reserve mechanism," advocating a return to pre-crisis methods—controlling the federal funds rate through fine-tuning reserve supply via open market operations, rather than maintaining massive reserves and controlling the lower bound of interest rates by adjusting the IORB (Interest on Excess Reserves). The core purpose of this framework shift is to return monetary policy to "price adjustment" rather than "quantity-based support." The market generally believes that if Warsh focuses too much on liquidity, it will have the following impacts: First, volatility in the money market will increase. Under Warsh's framework, interbank liquidity is no longer "as much as you want," but needs to be precisely adjusted through the Fed's open market operations. This means that the volatility of short-term funding rates (such as SOFR and repo rates) will increase, and financial institutions will need to manage intraday liquidity more proactively, rather than relying on the central bank's unlimited supply. Secondly, the "Fed's suppressive effect" on long-term interest rates will weaken. In the past QE era, the Fed directly suppressed the term premium by purchasing long-term Treasury bonds, keeping the 10-year Treasury yield below the level reflected by economic fundamentals for a long period. Once the Fed withdraws from this role, the term premium will return to the normal state determined by market supply and demand. During Yellen's era, the government relied too heavily on short-term debt (T-bills and T-notes) financing, and the supply pressure on long-term interest rates should not be underestimated. Finally, the market's "Fed's bottom-line expectation" will be broken. For the past fifteen years, whenever the market has experienced sharp fluctuations, traders' first reaction has been "Will the Fed intervene?" This expectation itself has suppressed volatility. However, if Warsh explicitly raises the intervention threshold, the market will have to relearn to digest volatility independently. This will directly manifest as a rise in the central level of volatility indicators such as the VIX, and high-level fluctuations in highly valued and leveraged assets. Therefore, Warsh advocates reducing forward guidance and decreasing the frequency of Fed officials' statements, arguing that over-reliance on short-term data forecasts constitutes inappropriate intervention in the market. In the Powell era, risk assets would react in advance whenever the dot plot indicated room for future rate cuts, because the market believed the Fed's measures would "arrive as expected." However, in the Warsh era, the Fed's communication style will change how "rate cut expectations" affect the market. To understand why Warsh developed such policy preferences, we must return to his resume: his experience from Wall Street to the White House, and then to his time at the Fed, combined with his family background, and how this shaped Warsh's decision-making logic. Behind Warsh's Election: A Unique Background Shapes a Critical Personality Overall, Warsh's resume can be summarized as follows: he entered the White House using his Wall Street experience and language of working with financial markets, and then used his White House policy coordination skills to enter the Federal Reserve. Before entering the public sector, Warsh served as a senior executive in mergers and acquisitions and capital markets at Morgan Stanley. This Wall Street experience may have given him value in his way of thinking: in the investment banking system, the most sensitive factors are not GDP growth or CPI data, but interest rate spreads, liquidity, and financing conditions. A deeper impact is that his Wall Street experience naturally led Warsh to prefer using "market signals" rather than "statistical data" to judge the state of the economy. This way of thinking differs from Powell's "adjusting the steering wheel based on the dashboard of economic data." Walsh is more like a driver who judges the path by sensing the bumps in the road—which foreshadowed his later advocacy of "trend dependence rather than data dependence." Kevin Warsh's Main Career Overview (Table)

Kelvin Warsh's Main Career Summary

Data Source: Online Data Collection

Wall Street experience may have increased Warsh's sensitivity to funding costs, credit spreads, liquidity, and risk appetite. This ability was precisely the "translator" the White House National Economic Council (NEC) needed when discussions on financial regulation and capital market policy intensified in the early 2000s. From 2002 to 2005, Warsh served as Special Assistant to the President for Economic Policy in the Bush administration, responsible for coordinating between the Treasury Department, regulatory agencies, and the markets.

In 2006, Warsh was nominated to the Federal Reserve Board of Governors, which aligned with the personnel selection logic at the time: the financial system was becoming increasingly complex, shadow banking was expanding, and housing finance risks were accumulating. The Fed needed someone who understood both market microeconomics and government coordination to enter the core decision-making level. Warsh's appointment was likely due to his ability to clearly explain the "effects of policy tools" using the language of "financial conditions and market feedback." In 2011, Warsh left the Federal Reserve early to conduct policy research at platforms such as the Hoover Institution at Stanford. His early departure, in retrospect, resembled a "quick exit after completing his mission." This may have led to Warsh's long-term emphasis on the boundaries of central banks and the institutional costs of unconventional tools, forming a clearer framework for institutional criticism. It also made it easier for the market to see him as a candidate who could "maintain a communication channel" between government demands and Wall Street stability. Furthermore, his marriage embeds him within the established American capital and political social networks: his spouse is a member of the Estée Lauder family, and his father-in-law, Ronald Lauder, wields considerable influence in American political and business circles, with the media repeatedly mentioning his long-standing acquaintance with Trump. This background does not directly determine his policy stance, but it aligns with Trump's "elite family" persona in selecting candidates. Overall, Warsh's resume, encompassing his experience on Wall Street, in the White House, and at the Federal Reserve, may have made him sensitive to financial conditions. His White House experience gave him an understanding of political constraints and policy coordination, his time at the Federal Reserve fostered a preference for the long-term effectiveness of policy tools, and his family and network of connections increased his chances of securing positions at key junctures. So, returning to the realm of political economy, even if the market clearly understands Warsh's policy proposals, can he deliver on his anticipated reforms under the current political landscape? Why Warsh: Considerations Behind Trump's Nomination To understand why Trump ultimately chose Warsh over Hassett, Reid, or Waller, we must interpret it within the context of Trump's current political situation. The White House's demands on the new chairman can be broken down into two layers: subjective requirements and objective constraints. First, the subjective requirements are loyalty, obedience, and a willingness to cut interest rates. From the Trump administration's perspective, given Powell's precedent of "slow interest rate cuts," Trump is most afraid of repeating that mistake. However, they must also address the following: whether the new candidate can pass the Senate, whether they can gain the trust of the Fed's internal staff, and whether they can quell Wall Street's doubts about the Fed's independence. Looking at a horizontal comparison of candidates, Hassett scores highest in "loyalty," but the other three are less satisfactory (the market is particularly worried about the huge impact his appointment will have on the Fed's independence); Waller scores highest in "objective constraints," but his loyalty is questionable, making him easily excluded; Warsh is a candidate with no obvious weaknesses—he has sufficient communication channels to reassure the White House (through his father-in-law's personal relationship and his mentor Bessant's relationship), and sufficient professional credibility to convince the market (Wall Street background, Fed experience, crisis response experience). "Hawkish credibility" became Walsh's greatest competitive advantage. With inflation concerns lingering and markets sensitive to independence, only when someone perceived as a hawk was at the helm could the market believe that future interest rate cuts were based on monetary discipline rather than political compromise. This logic of "hawkish credibility endorsing dovish policies" is not uncommon in history—Volcker was able to control inflation in the 1980s precisely because the market believed in his determination to "prefer recession to price stability"; Greenspan enjoyed the "Goldilocks economy" partly because of his early image as an "inflation hawk." Warsh's situation is similar: when he supports interest rate cuts, the market tends to believe it's based on a rational assessment of the neutral interest rate (he believes current rates are 50-100 basis points higher than the neutral rate, which is around 3%), rather than political pressure. More importantly, while his "interest rate cuts + balance sheet reduction" combination seems contradictory, it has some theoretical consistency: Warsh attributes inflation to the combined effect of unrestrained fiscal expansion and quantitative easing, rather than overheated demand. Within this framework, the focus of monetary policy should be on constraining the fiscal financing function, rather than suppressing private sector activity—this logic provides both an "academic package" for the interest rate cuts the White House wants and a solution to the market's concerns about discipline. From the perspective of balancing "political controllability" and "market independence," Warsh's professional background and "hawkish" label are enough to convince the market that he is not a mouthpiece for the White House; internally, the White House believes he will not be as "uncontrollable" as Powell. This is because, in an environment where inflation concerns have not completely subsided and the market is highly sensitive to independence, a "dovish chairman" perceived as overly politicized would first push up risk premiums and long-term interest rates, ultimately making housing, corporate financing, and government financing more expensive; conversely, a person labeled with "monetary discipline" pushing for interest rate cuts is more likely to be believed by the market to be based on a judgment of the neutral interest rate and financial conditions, rather than purely political compromise. Finally, a frequently overlooked factor is the pressure of Trump's midterm elections in 2026. Historical data shows that the ruling party generally has a higher probability of losing midterm elections, with only a few exceptions in recent decades. This means that Trump's biggest political task this year revolves around the "cost of living for voters"—prices, employment, and housing financing costs directly affect votes. While Hassett's aggressive interest rate cuts meet short-term needs, they may trigger market concerns about a rebound in inflation or a loss of independence, causing long-term interest rates to rise instead. For example, in the second half of 2024, when Trump frequently attacks Powell, the 10-year Treasury yield rises instead of falling. Warsh's value lies in his ability to provide some assurances before the midterm elections: he won't be as radical as Hassett to the point of causing panic, nor will he be as extreme a hawkish as rejecting any easing. His "gradualism"—maintaining a steady pace before the election and discussing reforms afterward—perfectly matches the White House's political timetable. This reflects Trump's realpolitik logic under pressure from the midterm elections: winning the midterms first gives him the leverage to implement subsequent reforms. Therefore, it's worth considering whether Warsh, as a reformist, will push for the "balance sheet reduction + interest rate cuts" policy as the market expects. Warsh's Constraints and Actions: His Proposals and How They Will Be Implemented Warsh's policies will also face constraints from the political environment, market realities, and internal checks and balances within the Federal Reserve. From a liquidity perspective, the conditions for balance sheet reduction may not be present at present. In December 2025, overnight reverse repo flows gradually dried up, and the money market liquidity, after 26 years, has become tight. As shown in the figure, over the past 26 years, ONRRP (overnight reverse repo) has fallen to near zero, the SOFR-ONRRP spread has risen to a historical high of 32bp, and the usage of SRF (Standing Repo Facility) has also continued to climb. This may indicate that interbank liquidity has turned "slightly tight." For this reason, the Federal Reserve launched RMP (Reserve Management Purchases) last December to improve liquidity. If the Fed forces a reduction in its balance sheet, it will likely repeat the repo market crisis of September 2019 (when the overnight repo rate soared to 10%, forcing the Fed to urgently restart repos and expand its balance sheet).

ONRRPDepletion of funding premiums and liquidity shortages

Data source: FRED, Zhongtai Securities Research Institute

More noteworthy is that quantitative tightening will also push up long-term interest rates: When the Fed reduces bond purchases, the term premium returns to market supply and demand, while the US Treasury needs to roll over approximately $9 trillion in debt annually and relies primarily on short-term debt, resulting in enormous pressure on long-term supply.

Therefore, Warsh's most realistic option is to maintain the current RMP pace and persuade the FOMC to reduce purchases only after liquidity has significantly improved, provided there is no repurchase market crisis. Meanwhile, the Fed's internal decision-making mechanisms may also constrain Warsh's policies. The Fed's decisions are made collectively by 19 members, not by the chairman alone. Deciding on QE or QT, and whether to adjust the reserve framework, is the result of a collective decision by 19 officials (12 voting members). When the FOMC announced the restart of the RMP last December, the resolution received zero dissent—all officials unanimously supported technical balance sheet expansion. This means that even if Warsh wanted to reverse the RMP, he would need to persuade other officials. The hawkish and dovish distribution within the FOMC will not change drastically due to a change in chairman: regional Fed presidents are appointed by their regional boards of directors and are not directly controlled by the White House; governors have staggered terms and cannot be arbitrarily dismissed. The original intention of this mechanism was to prevent the Federal Reserve from being politicized and driven by short-term gains. If Warsh wants to push for a major shift, a consensus must first be reached within the FOMC. This explains why he is most likely to change his "communication style" first—reducing the dot plot and decreasing his public statements, requiring only FOMC consensus without involving radical adjustments to policy tools. The most thought-provoking aspect is the need to "fulfill commitments" before the midterm elections. Trump's choice of Warsh likely means that the two sides have reached some kind of tacit understanding. At least until the midterm elections in November 2026, Warsh faces political pressure from the White House and needs to "fulfill commitments" to a certain extent—avoiding major actions that could cause panic before the election and cooperating with the demand for interest rate cuts if data allows. Because quantitative tightening is a short-term contractionary policy, rising long-term interest rates and tighter financing conditions will directly impact housing and investment, contradicting Trump's strategy of "reducing the cost of living for voters." In the second half of 2024, when Trump attacked Powell, market concerns actually pushed up long-term interest rates—a profound lesson. Therefore, political constraints determine the reform timetable: maintaining a steady pace and avoiding major moves before the midterm elections, allowing room for institutional adjustments after the elections—this may be the realistic path Warsh learned during his political maneuvering in the White House. The Walsh Era: What Impact Will It Have on Capital Markets? The November 2026 midterm elections may become a natural watershed moment for policy pace. Phase One (May - November): Warsh's core objective is to cooperate with the White House's political demands without triggering market panic, limiting the number of rate cuts, which may spark discussions about the end of the rate-cutting cycle after each cut. On the one hand, the Fed's communication style may change. Reducing the frequency of the dot plot, decreasing the details of post-meeting press conferences, and limiting officials' statements—these reforms only require internal consensus within the FOMC and do not involve radical adjustments to policy tools. The market will soon feel the impact: the Fed's guidance may be less frequent than during Powell's era, policy path uncertainty will rise, volatility premiums will increase, and the boosting effect of interest rate cut expectations on risk assets will weaken. On the other hand, the balance sheet will not be reduced hastily. As mentioned earlier, only when liquidity indicators improve significantly (ONRRP rebounds, spreads narrow, SRF usage decreases) will Warsh be able to persuade Fed officials to approve balance sheet reduction measures. This is contingent on the market not triggering a 2019-style repo market crisis. Phase Two (after November): Gradual, tentative reforms will be the main approach. Regardless of the Republican Party's outcome in the midterm elections, Warsh's reforms will adopt a gradual approach, avoiding a hasty and aggressive quantitative tightening or an immediate announcement of monetary policy tightening. Warsh may combine internal Fed disagreements with the financial market's reaction to push forward reform measures. For example, Warsh believes that if the IRB (Interbank Interest Rate on Excess Reserves) is too high, banks will lose the incentive to lend to the real economy. He proposes lowering the IRB and simplifying the forward guidance framework. Warsh's Wall Street experience has taught him that institutional changes must allow the market sufficient time to adapt. If the market reaction is stable and money market interest rate fluctuations are manageable, then the next step will be considered; if abnormal fluctuations occur, an immediate pause and reassessment will be implemented. If the US economy experiences a recession in 2027-28, Warsh's reform measures will face a dilemma. This is why, compared to the Powell era, Warsh's monetary policy proposals will not have a significant impact on pre-election capital markets. Only if the White House stabilizes its position in the midterm elections will Warsh have the political capital to push forward long-term adjustments after the elections. It is important to emphasize that Warsh's nomination was merely the "straw that broke the camel's back" due to liquidity concerns, not the sole cause. The structural "cash crunch" triggered by the zeroing out of ON RRP since the fourth quarter of 2025, the excessive leverage speculation in precious metal assets, and the valuation correction due to the decline in AI expectations have collectively contributed to the recent sharp price fluctuations in precious metals and risk assets. For global capital markets, the "Wash Shock" didn't truly change the interest rate decision of a single meeting, but rather market expectations regarding changes in the liquidity path of monetary policy over the next few years. Once the market begins to believe that the new chairman is more concerned with monetary discipline, more cautious about balance sheets, and more sensitive to long-term institutional costs, volatility will rise significantly. On the one hand, Warsh is likely to adopt a more restrained approach in coordinating limited interest rate cuts before the midterm elections, and stabilize financing conditions through regulatory and technical arrangements, which will provide a window for market recovery. On the other hand, as long as Warsh continues to release "reform expectations," term premiums and uncertainty premiums will be repriced, and the first to be pressured will still be high-valuation assets that rely on the financing environment (technology growth, crypto, and various highly leveraged transactions). Precious metals will switch back and forth between "safe-haven narratives" and "deleveraging," exhibiting high volatility. More importantly, this volatility will be self-reinforcing: once asset prices retreat, the market will not only worry about weakening fundamentals, but also about further tightening of liquidity and greater difficulty in controlling the pace of policy, thus triggering a second sell-off; conversely, if risk assets rebound, it is easily interpreted as excessively loose financial conditions, suppressing the space for further easing. Therefore, overall, the narrative of a weak dollar remains intact, and the technology sector may still outperform. However, against the backdrop of increased volatility, US stocks may focus more on fundamentals, and the return of value stocks is noteworthy. At the same time, it is crucial to control high valuations and leverage levels to avoid excessive drawdowns during periods of tightening liquidity expectations. For domestic investors, a balanced portfolio should be constructed to mitigate the impact of technology sector adjustments following US liquidity shocks. Risk Warnings: 1. Uncertainty exists regarding Warsh's nomination and policy implementation; 1) Senate confirmation and political maneuvering may be repeated; 2) The FOMC makes collective decisions, and the chairman cannot unilaterally push for a switch to balance sheet reduction; 2. US inflation, employment, and economic data may fall short of expectations; 3. Liquidity in the US stock market may tighten more than expected.