Kevin Warsh: Reformer or Sorcerer’s Apprentice?

• Jean-Christophe Rochat
  CIO
  Banque Heritage

Donald Trump’s protégé has entered the stage. Judging by his first few weeks in office, he is unlikely to become the President’s puppet—and that is good news. Without fanfare, and with considerable caution, he is nevertheless ushering in a profound shift in the Federal Reserve’s operating framework.

Goodbye Forward Guidance

Kevin Warsh is methodically dismantling parts of the institutional architecture the Federal Reserve has built over the past two decades. Five task forces have been appointed to review the Fed’s communication strategy, balance sheet, data, productivity, employment and inflation framework. The objective is straightforward: go back to first principles and rewrite the playbook.

The first signs of change are already visible—and precisely where markets naturally focus their attention: communication. Warsh wants a Federal Reserve that says less but says it more clearly. The famous “dot plot”, with its individual projections for future interest rates, appears to be living its final months. Its disappearance would mark the end of the market’s fixation with published forecasts and restore greater weight to the FOMC’s collective judgement.

A brief reminder is useful. Modern forward guidance emerged in 2003 and quickly became one of the Fed’s key monetary policy tools. Between 2008 and 2015, it helped avoid negative interest rates, anchored investors’ expectations and enhanced the effectiveness of monetary policy. It is precisely this crutch that Warsh now appears determined to remove.

A more restrained Federal Reserve would gain flexibility—and probably credibility. It would, however, sacrifice part of its ability to shape market expectations and keep the bond market firmly under control.

Quantitative Easing

The Fed’s new Chair also intends to draw a line under the era of quantitative easing and “easy money”.

His objective is clear: gradually move away from the regime of ample reserves, reduce a balance sheet that still stands at around USD 6.6 trillion, and return to a more conventional framework centred on US Treasuries.

The timetable is expected to be cautious. Most of the adjustment is likely to take place between 2027 and 2029 through a gradual and carefully managed programme of quantitative tightening (QT), designed to avoid reigniting memories of previous liquidity crises.

The paradox is worth highlighting. The federal funds rate may well decline, while financial conditions continue to tighten as QT progresses and the term premium rises.

All this comes against the backdrop of the US Treasury’s enormous financing needs, which are likely to keep upward pressure on long-term yields for some time.

The Regulatory Straitjacket (Dodd-Frank & Co.)

The third area of reform concerns banking regulation. The objective is to place the private sector back at the centre of liquidity creation. Banks will be expected to absorb a larger share of Treasury issuance while extending more credit to the economy. Liquidity will no longer rely primarily on an oversized public-sector balance sheet, but increasingly on commercial banks and capital markets. Its price will be determined more by private intermediation than by the long shadow cast by the Federal Reserve.

This shift forms part of a broader strategy that the Trump administration has been preparing for several months. During 2025, the wave of deregulation swept away part of the post-financial crisis regulatory framework, with more than one hundred existing rules reportedly removed for every new one introduced. At the Treasury, Scott Bessent has launched a comprehensive review of banking regulation, easing capital and leverage requirements while refocusing the Financial Stability Oversight Council (FSOC) on promoting economic growth rather than concentrating solely on systemic risk prevention.

In the short term, this approach is likely to support the US economy—unless the bond market decides to remind policymakers that it often sets the ultimate limits.

Over the medium to longer term, however, the probability of another financial crisis clearly increases.

What Lies Ahead for Markets

In the near term, the US macroeconomic backdrop should remain supportive. The principal risk is one of overheating, with inflation expectations potentially rebuilding once the temporary disinflationary effect of lower energy and commodity prices fades.

An excessively rapid steepening of the yield curve would quickly put pressure on the housing market and could also expose more vulnerable segments of the high-yield bond market.

For financial markets, the combination remains appealing: federal funds rates kept as low as possible alongside an explicit programme of deregulation provides clear support for risk assets.

Yet investors, currently absorbed by developments in the Middle East, are unlikely to remain focused on geopolitics for long. Attention could quickly shift to Jackson Hole at the end of August. It is there that markets may begin to realise that the much-discussed “Fed Put” is gradually disappearing. A more orthodox Federal Reserve—less interventionist and less inclined to suppress bond market volatility—would fundamentally alter the investment landscape.

The timing adds another layer of uncertainty. The task forces are expected to conclude their work just as the US mid-term elections approach and two artificial intelligence giants prepare for their stock market debuts.

Many changes. Many uncertainties.