Major Hearing Tomorrow Night: Will Warsh Turn Hawkish? Deutsche Bank Reveals Five Key Points

At 10:00 AM Eastern Time on April 21, Federal Reserve Chair nominee Kevin Warsh will appear before the Senate Banking Committee. For investors, this is not merely a confirmation vote but a critical window to assess whether he will adopt a hawkish stance. Understanding Warsh's policy positions is the primary prerequisite for predicting the future direction of US monetary policy.

Deutsche Bank has outlined five core focus areas for this hearing in its latest research report, with the foremost being how Warsh balances the "long-term vision for interest rate cuts" against the "short-term reality of inflation." Previously, Warsh supported interest rate cuts based on the logic of "deregulation and AI-induced deflation," but the current labor market stabilization, PCE inflation exceeding expectations, and Middle East tensions pushing up risks have significantly altered the macroeconomic environment. Considering he is not a structural dove, it is expected that he will avoid strongly advocating for near-term interest rate cuts during the hearing.

Additionally, Deutsche Bank notes that Warsh's positions on the balance sheet, communication framework, and Federal Reserve independence are equally critical. He advocates for a smaller balance sheet, questions the effectiveness of forward guidance, and criticizes the Fed's "mission drift."

Citigroup believes any statement by Warsh regarding monetary policy or the role of the Federal Reserve could quickly be reflected in asset pricing. Treasury Secretary Bessent stated this week that he "understands the Fed may need to wait for interest rate cuts," providing Warsh with some room for maneuver, but the market remains waiting for a clear policy anchor.

Meanwhile, the nomination confirmation process faces political headwinds. Republicans hold only a one-vote majority in the Senate Banking Committee, and Senator Tillis has pledged to oppose the nomination until the Justice Department completes its investigation into the renovation of the Federal Reserve building. This could delay Warsh's confirmation; if he fails to be approved in time, Powell will serve as Acting Chair. This means it remains uncertain whether Warsh will ultimately successfully steer the Federal Reserve.

Interest Rate Cut Stance: How to Balance "Long-Term Vision" with "Short-Term Reality"?

The first highlight of Warsh at the hearing is whether he will continue to strongly advocate for interest rate cuts or shift to a hawkish stance due to recent data.

Previously, the theoretical basis for Warsh supporting interest rate cuts was primarily built on the prediction that "deregulation and artificial intelligence would bring significant deflationary effects." However, the current economic environment has changed: the labor market is stabilizing, PCE inflation is rising above expectations, and Middle East tensions further increase inflation risks. These factors clearly diminish the urgency for interest rate cuts.

The stance within the Federal Reserve has also turned hawkish. At the March meeting, "some" officials believed the policy outlook should use "more two-way language," no longer unilaterally emphasizing interest rate cuts. Market pricing is also cautious, currently implying only about 8 basis points of interest rate cuts for this year. Notably, Warsh is not a structural dove—he warned of inflation risks from quantitative easing during the global financial crisis and did not support the 50 basis point interest rate cut in September 2024. In the current context, if he leads a committee increasingly inclined to maintain interest rate stability, the likelihood of him strongly advocating for interest rate cuts in the short term is low.

The true key lies in how Warsh balances the "long-term desire for interest rate cuts" with the "reality that interest rate cuts are not needed in the current environment." He may adopt wording such as "cautious about inflation risks in the short term, then resume easing later," thereby seeking a balance between long-term goals and short-term constraints.

Balance Sheet: "Rapid Slimming" or "Gradual Reduction"?

Whether Warsh will support the "ample reserves" framework and accept the consensus of "reform bank regulation first, then gradually reduce the balance sheet" is the second core focus of the hearing.

Warsh's significant difference from other candidates is his public advocacy for the Federal Reserve to maintain a smaller balance sheet. His logic is: reducing money supply and tightening overall financial conditions through balance sheet reduction to lower inflation, creating space for future interest rate cuts.

Although this stance sparked heated debate early in the nomination process, the market has gradually formed a consensus—balance sheet reduction requires a lengthy process, contingent on reforming bank regulation first to lower reserve requirements. This path has been supported by several Federal Reserve officials, including Supervisory Vice Chairman Bowman, Governor Miran, and Dallas Fed President Logan. The market will watch whether Warsh endorses this more gradual pace of balance sheet reduction.

Another key question is whether Warsh will continue to use the "ample reserves" framework or lean towards returning to the "scarce reserves" model. Deutsche Bank believes he may suggest a comprehensive review of the Federal Reserve's balance sheet and policy implementation, but any substantive adjustments may take years to materialize.

Over the past approximately 15 years, Warsh has consistently criticized the Federal Reserve's overuse of balance sheet tools. While he supports the quantitative easing (QE) first introduced to address the global financial crisis, he warned that subsequent QE plans were inappropriate, potentially raising inflation, exacerbating financial stability risks, and causing the Fed to deviate from its core responsibilities into credit allocation policies that may distort markets. As he recently stated:

"In the summer and autumn of 2010, with strong economic growth and financial stability, I was very worried that further purchases of Treasury bonds would involve the Federal Reserve in the chaotic political affairs of fiscal policy. When QE2 was finally announced, I disagreed with this decision and resigned from the Fed shortly thereafter."

Regarding asset portfolio structure, the Federal Reserve is gradually reducing MBS size by reinvesting maturing MBS proceeds into Treasury bills, and accelerating this process through direct sales in the future is not excluded. The Committee has not yet determined the steady-state target for the Treasury bill portfolio. If Warsh ultimately leads the Federal Reserve, he may tend to choose a portfolio with a duration significantly shorter than the market average. Regarding future quantitative easing, it is almost impossible for the Committee to abandon effective monetary policy tools in a zero lower bound environment, but they may adopt different purchase structures to address market dysfunction.

Communication Framework: Farewell to "Detailed Forward Guidance", Embrace "Long-Term Narrative"?

Whether Warsh will reiterate his criticism of the Federal Reserve's communication strategy and tools and propose specific reform plans is the third core focus of the hearing.

Warsh has long questioned the use of forward guidance during normal times, believing that its potential costs—damaging credibility and reducing flexibility—outweigh the benefits. It is expected that he will continue this critical stance and push for reduced reliance on detailed forward guidance.

While he holds reservations about the dot plot (SEP), completely eliminating the tool is unlikely to gain sufficient support within the Committee. More feasible reform directions include: adopting rolling forecast windows, focusing on the central tendency or range of forecasts rather than individual dots, or embedding the dot plot within a broader risk and scenario analysis framework.

Warsh is highly likely to retain post-meeting press conferences but position them from a platform for short-term policy signals under "data dependence" to conveying an economy-oriented long-term narrative, potentially focusing on the theme of "productivity boom" in the short term.

Regarding communication subjects, while he hopes to convey a more concise "single voice" message, institutional and political realities make it neither realistic nor advisable to significantly limit the space for regional Fed presidents to express themselves publicly, which could instead raise concerns about Federal Reserve independence and backfire.

Independence: How to Choose Between "Political Pressure" and "Central Bank Credibility"?

Whether Warsh unconditionally supports Federal Reserve independence and maintains distance from the government's call for "significant interest rate cuts" is one of the key focuses of the hearing.

Although Warsh has described Federal Reserve independence as a "worthwhile" cause in past comments, he also pointed out that the Fed's own performance has undermined the justification for its independence. He believes "the Fed's role is too large and performance is poor," and condemns its "mission creep"—including intervening in issues like climate and inclusivity.

Like any new Chair, Warsh needs to win the market's trust in achieving inflation targets through concrete actions. The current environment is particularly severe: inflation has been above target for five consecutive years, recent oil price spikes bring new price shocks, and the President explicitly demands significant interest rate cuts. Based on this, Warsh is likely to deliberately emphasize the importance of independence and maintain distance from the government's calls for interest rate cuts.

Personnel and Nomination: The "Hot Potato" of the Justice Department Investigation and Powell's Tenure

Whether Warsh will comment on the Justice Department's investigation into the Fed and whether Powell is willing to remain on the Board after his Chairmanship ends are another set of focus points.

A key variable currently is the timeline for advancing the nomination. Senator Tillis recently reiterated that he will block all nominations until the Justice Department's investigation into Powell concludes. Therefore, Warsh will likely be asked for his views on this investigation. It is expected that he will decline to comment in order to maintain a balance between government support and the Fed's position.

Relatedly, Warsh may also be asked whether Powell will continue to serve as a Governor after his Chairmanship ends—Powell has not ruled out this possibility thus far, and Trump administration officials hold a critical attitude towards it. Given that Warsh, once approved, needs to effectively lead a committee that may include Powell, he is unlikely to express strong opinions on Powell's departure plans.