Subject: Kevin Warsh and changes at the Fed
https://www.nytimes.com/live/2...
Trump Administration Live Updates: Justice Department Closes Inquiry of Federal Reserve Pushed by Trump

The Justice Department, in a stunning reversal, announced on Friday (today, 4/24/2026) that it was dropping its criminal investigation into the Federal Reserve and its chair, Jerome H. Powell. The decision could clear the path for Kevin M. Warsh, President Trump’s pick to lead the central bank, to win confirmation…

A top Republican on the Senate Banking Committee, Thom Tillis of North Carolina, vowed to block any of Mr. Trump’s nominees until the legal threats against Mr. Powell were dropped…

If Mr. Warsh is not confirmed by May 15, Mr. Powell has said that he would stay on as chair on a temporary basis. He can technically remain a member of the Fed’s board of governors until 2028. …[end quote]

Assuming that sanity prevails and Mr. Warsh is confirmed as Fed Chair, here are his concepts that would directly impact our investments.

https://www.nytimes.com/2026/0...


How Kevin Warsh Could Shrink the Fed’s Footprint in Financial Markets

President Trump’s nominee to become the next chair of the Federal Reserve wants to overhaul the central bank, including its more than $6 trillion balance sheet.

By Colby Smith, The New York Times, April 24, 2026

…
Mr. Warsh wants the Fed to have a smaller footprint in financial markets and for there to be closer coordination with the Treasury Department on what the Fed holds in its portfolio and what the government issues in terms of debt to fund itself. Mr. Warsh has argued that reducing the central bank’s holdings will give officials space to lower interest rates, something President Trump has long desired. The rationale is that longer-term rates are likely to rise as the balance sheet shrinks, which then could be offset by lowering short-term rates. [I agree that longer-term rates are likely to rise as the balance sheet shrinks but I don’t understand how it follows that short-term rates should be lowered if inflation is still high and the economy is not slowing. This may be a bait-and-switch to win the support of President Trump who wants lower rates. – W]…

[snip a long discussion about bank liquidity]

For Mr. Warsh, closer coordination between the Fed and Treasury would also help. Mr. Warsh has floated a revamp of a 1951 agreement that established the Fed’s monetary policy independence while giving Treasury control of government spending and taxation. What a new “accord,” as Mr. Warsh has called it, is likely to entail at a minimum is an alignment in what securities the Fed is willing to hold on its balance sheet and what Treasury wants to issue in terms of government debt. The department’s preference now appears to be Treasury bills, which Mr. Warsh seems to favor for the Fed as well.

Concerns about how independent the Fed will remain under Mr. Warsh has caused concern, however, that closer coordination between the two institutions will just be a first step toward the Fed becoming more enmeshed in the administration. At worst, economists fear some version of “fiscal dominance,” in which the Fed begins to prioritize the government’s financing needs over controlling inflation…[end quote].

Fiscal dominance is a common characteristic of governments that are heading toward bankruptcy, along with currency debasement. The right hand (the central bank) buys the debt of the left hand (government deficit spending), bypassing the bond market’s reluctance to continue buying the debt. Fiscal dominance suppresses interest rates and shuts out borrowing by the real economy.

Kevin Warsh has said that the Fed is too involved in bailing out the government by buying Treasury debt. He seems to think that taking away the punch bowl will stop Congress from spending. I don’t know what universe Warsh is living in. The majority of the government debt is because of entitlement spending reinforced by tax cuts. Nothing the Fed does will influence Congress to change spending and taxes.

The most direct impact of Warsh’s policies would be higher long-term interest rates. That’s really bad for the bond market and could cause bank failures. (Silicon Valley Bank failed in 2023 because their long-term Treasuries lost value when the Fed raised interest rates.)

Financing the ballooning debt with Treasury bills, which are short-term debt, makes forecasting the debt harder since it would constantly be changing. Treasury should have re-financed the debt to 30 year Treasuries in 2020 when yields were low.
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Assets: Total Assets: Total Assets (Less Eliminations from Consolidation): Wednesday Level

Wendy