Three weeks from today will mark Jerome Powell’s final day as Fed chair and, potentially, open the door for President Donald Trump’s nominee, Kevin Warsh, to succeed him. It may also mark a shift in fortune for the Dow Jones Industrial Average (^DJI 0.16%), S&P 500 (^GSPC +0.80%), and Nasdaq Composite (^IXIC +1.63%).
Since Trump’s second, non-consecutive term began, Powell and the president have been butting heads over interest rates. Trump has been vocal in his belief that interest rates should be lowered to 1% (or below), and has blamed Powell and members of the Federal Open Market Committee (FOMC) for not cutting rates fast enough. The FOMC is a 12-person body, including Fed Chair Powell, responsible for setting the nation’s monetary policy.
Meanwhile, outgoing Fed chair Jerome Powell has been steady in his assertion that the FOMC will uphold the dual mandate of stabilizing prices and maximizing employment, and allow economic data to guide their decision-making.
Jerome Powell’s term as Fed chair ends on May 15, 2026. Image source: Official Federal Reserve Photo.
Kevin Warsh said the quiet part out loud during his Senate testimony
On Jan. 30, Trump officially nominated Warsh to succeed Powell. Warsh was previously on the Board of Governors of the Federal Reserve and was a voting member of the FOMC before, during, and after the financial crisis. His five years on the FOMC would bring experience to the position.
But before Kevin Warsh can become the 17th chairperson since the Fed’s creation, he’ll need to be confirmed by the U.S. Senate Banking Committee and then U.S. Senate. Earlier this week, he gave two-and-a-half hours of testimony in front of the Senate Banking Committee.
While the discussion revolved around the central bank’s independence in light of President Trump’s demands that interest rates be lowered, Warsh also sprinkled in views of how the Fed would potentially transform under his leadership.
In particular, when questioned about the Fed’s balance sheet by Sen. Cynthia Lummis (R-WY), Warsh had this to say,
[A] large balance sheet where the Fed owns more outstanding debt than many parts of the financial markets, that’s fiscal policy in disguise. Fed needs to get out of the fiscal business.
These final nine words, “Fed needs to get out of the fiscal business,” point to the Fed chair nominee’s strong belief that the central bank should be a passive market participant. In other words, Warsh made clear that he wants to see the Fed’s $6.7 trillion balance sheet meaningfully deleveraged.
Kevin Warsh Nomination: one reason why market players are interpreting it as a hawkish pick- I agree-is because of his views on the need for a radical balance sheet reduction.
The $31 trillion-dollar American economy demands liquidity & financing needs that are larger than what… pic.twitter.com/zYunGAItV8
— Joseph Brusuelas (@joebrusuelas) January 30, 2026
Between August 2008 and March 2022, the Fed’s balance sheet, comprised primarily of long-term U.S. Treasury bonds and mortgage-backed securities, ballooned from less than $900 billion to almost $9 trillion. Though quantitative tightening measures have lowered this figure to $6.7 trillion, as of April 15, 2026, it’s still far too high for Warsh’s liking.
Paring down the Fed’s balance sheet may come with unintended consequences for Wall Street. Since bond prices and yields are inversely related, selling trillions of dollars in U.S. long-term Treasuries would be expected to lower bond prices and raise yields, thereby increasing borrowing costs.
The stock market began 2026 at its second-priciest valuation spanning 155 years, and with the belief that the FOMC would cut rates several times. Kevin Warsh’s actions would likely raise yields and may even stymie borrowing.
With the Iran war effectively taking near-term rate cuts off the table, a worst-case scenario for the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite may be playing out.
