Warsh Policy Advocates: Interest Rate Cuts and Balance Sheet Reduction Should Go Hand in Hand, Inflation is a Choice for the Fed

Following speculations that Kevin Warsh may become the next Federal Reserve Chairman, with markets now favoring Warsh over Harker, Deutsche Bank's Matthew Luzzetti team predicts that if Warsh is elected, he may support interest rate cuts while advancing balance sheet reduction (QT) simultaneously. However, the premise for both to occur concurrently is that regulatory reforms can reduce the banking system's demand for reserves, with uncertainties remaining in the short term.

As a top contender to succeed Powell, Warsh earlier this year proposed that inflation is a choice, suggesting that inflation is not caused by supply chains or geopolitics, but rather by the Fed's own policy decisions. He called for the Fed and Treasury to each be responsible for interest rates and fiscal accounts, emphasizing the Fed's need to reform and return to its core mission of maintaining price stability. Despite criticizing policies, he is extremely optimistic about the US economic outlook, believing that AI and deregulation will lead to a productivity boom similar to the 1980s.

In terms of his background, Warsh is a lawyer by training and served as a Fed governor from 2006 to 2011, playing a crucial communication role during the global financial crisis. He has long criticized the Fed's aggressive balance sheet expansion policy over the past 15 years, believing that quantitative easing deviates from the central bank's core functions. Currently, Warsh is a partner at the Duquesne Family Office, as well as a distinguished visiting fellow at the Hoover Institution and lecturer at the Stanford Graduate School of Business. His academic, regulatory, and investment background gives him broad influence in the field of monetary policy and financial markets. (Wall Street News)

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