Kevin Warsh Would Be the Wealthiest Fed Chair in History. But That Doesn't Mean He's Going to Have Wall Street's Back

Kevin Warsh Would Be the Wealthiest Fed Chair in History. But That Doesn't Mean He's Going to Have Wall Street's Back

Bram Berkowitz, The Motley Fool

6 min read

Kevin Warsh, President Donald Trump's nominee to be the next chair of the Federal Reserve Board of Governors, is one step closer to being confirmed.

Along partisan lines, the U.S. Senate Banking Committee voted 13-11 to advance Warsh's nomination, setting the stage for a full Senate vote during the week of May 11, CNBC reported.

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It seems increasingly likely that Warsh will get approved and replace current Chair Jerome Powell, who has led the Fed for the past eight years and intends to stay on the board.

Outside of his first stint at the Fed, Warsh has had an extremely successful career. In fact, if confirmed, Warsh would be the wealthiest Fed chair ever. But just because he's spent time on Wall Street, it doesn't mean Warsh is going to have Wall Street's back.

Warsh has had an illustrious career with ties to Wall Street

At roughly 56 years old, Warsh has already had an all-star career. He worked in investment banking at Morgan Stanley for seven years before joining President George W. Bush's administration, where he worked on the National Economic Council.

He was nominated to serve on the Fed's Board of Governors in 2006 and served until 2011, an incredibly turbulent time for the Fed, given that it was during the Great Recession. Warsh then became a lecturer at Stanford University and a fellow at the Hoover Institution, while also becoming a partner and advisor at the Duquesne Family Office, which is led by legendary investor Stanley Druckenmiller.

Over his distinguished career, Warsh reportedly amassed a fortune of over $130 million in assets, according to his financial disclosures, making him the wealthiest Fed chair ever. Warsh is also married to Jane Lauder of the Estée Lauder family, who also holds considerable wealth.

Warsh believes the Fed has been too involved in the market

Now, I don't believe that any Fed chair comes into the role with any loyalty to Wall Street. The chair, along with the rest of the Board of Governors, is committed to implementing monetary policy to achieve the Fed's dual mandate of maximum employment and stable consumer prices.

However, following the Great Recession, the Fed and U.S. Treasury stepped in to save the economy in a big way. Through quantitative easing (QE), the Fed essentially injected trillions of dollars into the economy over several years by purchasing U.S. Treasury bonds and mortgage-backed securities (MBS) for its own balance sheet.

Excess liquidity effectively flows through and stimulates the economy, though it doesn't always achieve the intended effects. For instance, many believe QE is partially responsible for elevated asset prices, such as inflated equity valuations and housing prices, which have created greater wealth inequality and affordability issues.

While the Fed has attempted to shrink its balance sheet, the COVID-19 pandemic led the Fed to once again pump trillions into the economy through QE. The Fed's balance sheet currently has roughly $6.7 trillion in assets.

During his eight years as Fed chair, Powell attempted to shrink the balance sheet through quantitative tightening (QT) in 2018 and 2019 and in 2022 until roughly the end of 2025. But QT has proven difficult to execute without causing issues. In 2019, QT drained reserves from the banking system, leading to a spike in overnight repo rates and forcing the Fed to step in.

The Fed did effectively shrink its balance sheet by over $2 trillion in the second go-round, but eventually had to stop, once again due to concerns about reserves.

Warsh has made it clear that he would like to shrink the Fed's balance sheet and reduce its impact on financial markets. Regardless of what impact it will have, shrinking the balance sheet means tightening monetary policy, or as the saying goes, removing the punch bowl, which has led to one giant party in the financial markets and is likely partly responsible for the extraordinary gains.

Previously, Warsh has also called for a "back-seat Fed" that could be less communicative than it was under Powell, who has been very transparent about the Fed's moves before they are made, giving Wall Street more time to reposition.

While Powell has received his fair share of criticism, particularly from Trump and others, he has found many fans in the market. In fact, when the U.S. Department of Justice subpoenaed Powell in a criminal investigation, Powell received a lot of support, notably from meme-stock investors.

Warsh may run into hurdles in the beginning

Regardless of what Warsh wants to do, he will face more pressing obstacles early on in his term, including balancing any remaining inflationary pressure with Trump's desire for the Fed to cut rates, which Warsh has previously supported.

Warsh is also only one member of the rate-setting Federal Open Market Committee (FOMC), which has become increasingly divided as the Fed's dual mandate has come into conflict.

At the beginning of his term, there may not be a whole lot Warsh can do. But in the long term, given previous criticism and comments about the Fed, Warsh likely won't want himself or the Fed, as an institution, praised by meme stock investors or Wall Street, or being viewed as someone pumping the market, at least the way it has since the Great Recession.

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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.