🥛 So, will Kevin Warsh cut rates? 📉

GM. This is Milk Road Macro, the newsletter that spots regime changes faster than your ex spots your new relationship on Instagram.

Here’s what we’ve got for you today:

✍️ Everything you need to know about Kevin Warsh and interest rates.
🎙️ The Milk Road Macro Show: The Market Is Risk-On… But Growth Isn’t (Yet) w/ Market Radar.
🍪 Crude oil rose on U.S.-Iran tensions, then eased as tensions cooled.

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EVERYTHING YOU NEED TO KNOW ABOUT KEVIN WARSH AND INTEREST RATES

Probably the most consequential single decision for asset markets has finally been made.

We now have a confirmed nomination for the next Federal Reserve Chair.

Kevin Warsh.

And he’s likely to bring a big shake-up to the Fed and how it works.

But the biggest question: is Warsh dovish or hawkish?

This is a big topic.

So I’ll separate this into two newsletters.

First, today we’ll look at Warsh’s views on interest rates.

Then, in a second newsletter, we’ll look at Warsh’s views on the Fed’s balance sheet.

Two critically important topics for asset markets.

Let’s take a look…

Regime change

Warsh has been calling for “regime change” at the Fed for more than a decade.

But what does that actually mean?

It starts with a fundamentally different theory of inflation.

The Fed currently assumes that inflation arises when the economy “runs hot” and workers get paid too much.

Warsh rejects this entirely.

For Warsh, inflation occurs when “the government prints too much, spends too much and lives too well”.

Warsh’s previous comments suggest he wants to rewrite the Fed’s entire framework - from one that blames workers and growth for inflation to one that holds government spending accountable.

Whether he can convince other Fed members of this line of thinking is another question.

Big views on AI

Warsh is also deeply optimistic about AI - and in fact, he has a good relationship with Palantir and its CEO Alex Karp.

Warsh has recently argued that the U.S. is at the front end of a productivity boom, and AI will make almost everything cost less.

He sees AI as structurally deflationary, potentially allowing the Fed to cut rates lower than currently expected.

In a recent interview, Warsh said the Fed is “a central bank that has inflation models that are stuck in 1978; with a governance system from a prior era, it cannot see the productivity miracle and sees economic growth as inflationary”.

OK cool, so is he a hawk or a dove?

A narrative has emerged that Warsh will be hawkish on interest rates.

This appears to stem from his views when he was previously a Fed Governor between 2006 and 2011, a period that spanned the Great Financial Crisis.

He wasn’t fully supportive of the need to lower rates during the GFC, fearing inflationary pressures (incorrectly).

His views at that time did not age well.

In April 2009, seven months after Lehman Brothers collapsed, with core PCE inflation at 0.8% and unemployment at 9%, he said:

"I continue to be more worried about upside risks to inflation than downside risks."

Source: Bloomberg

But his views have changed since then, with AI a big factor.

After leaving the Fed in 2011, Warsh worked with possibly the greatest investor of modern times - Stanley Druckenmiller - for 15 years.

And on the day of Warsh’s Fed Chair nomination, Druckenmiller was quoted in the Financial Times saying:

“The branding of Kevin as someone who’s always hawkish is not correct. Kevin right now very much believes you can have growth without inflation. I could not think of a single other individual on the planet better equipped. I’m really excited about the partnership between him and [Treasury Secretary] Bessent.”

Bessent also previously worked extensively with Druckenmiller - so you could say we now have a “Druckenmiller Treasury-Fed accord”.

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EVERYTHING YOU NEED TO KNOW ABOUT KEVIN WARSH AND INTEREST RATES (P2)

Will Warsh be a “Trump puppet”?

Trump is adamant that he wants rates slashed, and quickly.

He has made this abundantly clear ever since he started his second term a year ago.

So I think it’s unlikely that Trump hasn’t extracted some kind of blood oath with Warsh stipulating that he’ll attempt to cut rates - it would be unrealistic to assume otherwise.

Trump cares more about interest rates than almost anything else.

Warsh is known to be very close to the Trump family, and the reason he got the nod may be that Trump wants someone he is sufficiently close to so that he can “control the narrative.”

In this sense, Warsh may end up being more dovish on interest rates than the other candidates - he has certainly proven to be willing to show flexibility around his own views over time.

According to the Wall Street Journal, the day after the Fed Chair nomination, Trump joked during a speech (with Warsh in attendance) that he would sue Warsh if he doesn’t lower rates.

Although it’s also possible that Warsh has been telling Trump what he wants to hear in order to secure the job - and he’ll be his own man once in the seat.

But will we actually see a “Trump Fed”?

Even if Warsh wants to attempt to slash rates - can he actually do it?

The constraint here is the rest of the FOMC.

Because of the need to gain consensus among the 12-member FOMC voting board for interest rate decisions, the question of whether we will see a “Trump Fed” able to quickly cut rates largely depends on two things:

Whether the Trump administration can successfully fire current board member Lisa Cook for alleged mortgage fraud (this is subject to an ongoing Supreme Court case - she claims no wrongdoing).
Whether Jerome Powell remains on the FOMC board after his Fed Chair term ends. It’s not conventional for a chair to remain after their term ends, but it’s his choice. He could stay on purely to annoy Trump.

If both Powell and Cook leave the board, Trump will be able to replace them - and doves would then likely “have the numbers” to cut rates further than currently expected, regardless of economic data.

If Powell and Cook both remain on the board - it may be tough for Warsh to force through cuts if the economic data doesn’t call for it.

Here’s a graphic of the potential scenarios from Andy Constan , of Damped Spring Advisors.

Source: Damped Spring Advisors

Wrapping up

The best short description of Warsh is probably “a former hawk, turned AI-focused dove”.

But if he wants to cut rates, he’s still constrained by the rules surrounding the FOMC voting board.

When his nomination was announced, interest markets quickly priced in a marginally higher probability of rate cuts in 2026 (moving from less than two to roughly two).

So, the market hasn’t received Warsh as a “hawkish nomination”.

But the market isn’t currently expecting rapid rate cuts either.

Since his nomination, Warsh is yet to speak publicly about his views.

So, at the moment - it’s all just guesswork…

That’s it for this edition. Catch you in the next one.

MARKETS FEEL RISK-ON 📈

In today’s episode, we sat down with Market Radar to talk about what a risk on but not yet growth driven regime means for stocks, crypto, and metals right now.

Here’s what you will hear:

Why Market Radar’s regime based system points to a risk on and inflationary backdrop that can support equities if it sticks.
How to think about inflation signals, Truflation, and why the Fed is more likely to stay put than spark market chaos.
Why Bitcoin behaves like a liquidity release valve and what needs to flip before they get constructive again.
What is really driving the wild moves in gold and silver and why consolidation may come next.

Tune in and see for yourself 👇