Warsh Set to Face Early Reality Check as Trump’s Man at the Fed

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1:45This is Bloomberg Business Week Daily. Reporting from the magazine that helps global leaders stay ahead with insight on the people, companies, and trends shaping today's complex economy, plus global business, finance, and tech news as it happens. The Bloomberg Business Week Daily podcast with Carol Masser and Tim Stenevec on Bloomberg Radio. With more on Kevin Warsh, Bloomberg TV and Radio International Economics and Policy correspondent Michael McKee joins us here in the Bloomberg Business Week studio. He served on the Fed's Board of Governors during the financial crisis. He's advised President Trump on his economic policy.

2:22In the past, he's been a hawk. What do we know about Kevin Warsh in 2026? Well, we know he's straight out of central casting. We've heard that a couple times from the president. The most important thing. But you remember, the president chose Jay Powell because Janet Yellen was too short and didn't look like a central banker.

2:40Carol Massar:This matters to the president. This matters to the president. I mean, why would you bring it up. Anyway, Kevin Warsh does have the monetary policy background, and he's got a good Wall Street background, so he's well known there, because of course he started at Morgan Stanley before he went to the White House for George W. Bush, and then he's been working for Duquesne, for Stan Druckenmiller, for 15 years now. So he is well known, and people, he has put it this way, He's very qualified. Now the issue is, how does he get the things done that he has always thought needed to be done because Donald Trump put him up?

3:17In other words, Warsh has been a hawk, but he has also argued that inflation is the number one issue for the Fed. They've got to keep inflation down. And now he's sort of adopted the argument that Chris Waller's been using that AI, business investment, deregulation, going to make the economy grow faster with lower inflation, and therefore you can have lower interest rates. But how much of this is going to be seen as doing the president's bidding and how much of it is going to be seen as warshanomics, as somebody put it today? We're going to have to wait and see how he's able to sell this in public.

3:52Carol Massar:Well, let's go to that AI argument, Mike. Is that right? Do we know yet that it's going to be? Okay. But in theory, it should be. We saw this with the PC revolution in the 1990s. productivity went way up. Inflation went way down. And we could certainly repeat that. We just don't know how long it's going to take. There's a lot of AI out there, and it's being adopted more quickly than the PCs. And electricity took 50 years. But the question is not so much that everybody's using it, but everybody has to figure out how to use it to really increase productivity and to save money. And so that's the part nobody quite knows yet.

4:37The other converse side of that is if we don't need you because AI can do your job, then what happens to society? And that's another big issue. You know, I want to go back to what Tom Tillis said, a Republican senator who's an inaugural part of making sure that whoever is nominated becomes Fed chair or doesn't become Fed chair on the Senate Banking Committee. Does he actually make it through? Oh, I think he makes it through. But without Tom Tillis' support? I think he'll get Tom Tillis' support. Which would be as a result of the DOJ dropping its investigation into Jay Powell. Yes. Now, who's investigating Jay Powell?

5:22Judge Janine, the TV judge that Trump appointed as a U.S. attorney in the District of Columbia. And what did she do? She issued a subpoena for records of the Fed's buildings. She hasn't yet, as far as we know, gone to a grand jury. She hasn't sought an indictment. There are many ways they could easily say, OK, we looked at this and it wasn't a crime. You know, the president can still say, as he did today, that, you know, somebody made a profit off this. This is really bad management or whatever. and they can drop this before it becomes an obstacle to Warsh's getting through.

6:00Carol Massar:We want to bring Katie Kaminsky in, but before we do that, go to some of the things that Kevin Warsh, right, when he was at the Fed, as a Fed governor reluctant at times, right, to cut rates, now argues the Fed should reduce the size of the balance sheet, and he advocates changing how the Fed thinks about inflation and forecasts. So those are some of the key components that will be guiding him if indeed he is the next Fed chair. He doesn't like using short-term forecasts, and he finds it's part of the Fed communication problem. He says that every time some new indicator comes out, then you have half the Fed run out and make a speech and say they're tilting this way, and then they tilt the other way.

6:39So he doesn't like that, and he doesn't like forward guidance either. He finds that less than useful because you get locked into something that isn't necessary. But you said. We've all been in relationships. And probably one of the more important things for Wall Street is what does he do about the size of the Fed's balance sheet? His argument is that QE was necessary in the great financial crisis, but then they should have stopped. Instead, they kept going. And then they did it again during COVID. And now you have this big balance sheet, and the Fed can do its job without that. There's a lot of aspects to this, but it is going to be something that Wall Street is going to be concerned about going forward.

7:16Carol Massar:Sit tight, Mike. We want to bring Katie Kaminsky, who's been patiently waiting by. She's chief research strategist, portfolio manager at Alpha Simplex, grew up with us from a very chilly Boston, I know, because my daughter's there and she says it's cold, like New York. Katie, what's more chilly, Boston or some of the market reception that we got around Kevin Warsh? Although I have to say, I felt like it wasn't very clear cut in terms of the market reaction. Actually, I mean, from our perspective, it's very, it's been a huge cross-asset sell-off day. Yeah, we've seen we've seen sort of such huge moves in the metals.

7:52Carol Massar:It's sort of like this de-dollarization narrative that sort of reverted that everyone was piled into across multiple asset classes. So you're seeing correlations between asset classes spiking that normally wouldn't today. So it's actually quite a big cross asset class day to day. So how would you characterize, if you were to just look at the entire market response, cross asset, how would you characterize the response to this nomination? So the interesting part is I would characterize it as the market was really waiting for more of a pedal to the metal, get lower rates, and sort of this high octane approach.

8:29Carol Massar:And I think a more moderate candidate, ironically, has caused a sell-off in the sense of that theme that we were thinking the market's moving in that direction. But it was pretty much due for a sell-off, if you think about it, if you look particularly in the metals. I mean, that has been an extremely trendy asset class. And so for us, it's still just sort of maybe the top of a trend that's been very extended. Katie, what's your read on? And we had some visuals up there about Kevin Warsh and how he was passed over in 2017 when President Trump nominated Fed Chair Jay Powell, who we're assuming is going to stay on as a governor, right, after his chairmanship is over in the spring.

9:16Carol Massar:What kind of dynamic does that create, do you think, potentially in your view? And might it create some tension that plays out in financial markets and maybe in the Treasury trade? I mean, I definitely think that all eyes have been on the Fed, on independence of the Fed, on disagreements, on dissents. So I think for us, it's been the hardest asset class to trade because it just sort of goes in one direction and then reverts because it's very unclear what all of this means. So I think my general answer would be that we're going to have more uncertainty in bond markets, so more volatility and potential for more extreme scenarios, a little bit less of a trendy environment for trading bonds, which is tricky for us.

10:01I want to bring Michael McKee back into the conversation. Mike, I want to go back to that first message from the president this morning and the message on True Social. On top of everything, he is central casting and he will never let you down. The never let you down part, is it possible for a Fed chair to do his or her job without letting down the president? Probably not, because the incentives are different for the two of them. The Fed chair is supposed to be looking out for the economy, and the president's going to be looking out for the president, no matter who the president is. But does it have to be a major clash?

10:36A lot of that depends on what happens and the externalities that come in that you can't predict. It only took a year for the president's first nominee, when he passed over Warsh in his first term, to go to Powell. To go to Powell. And then after a year, they really still seem to start. Well, they were still at that point trying to figure out how to get out of the zero bound range because they'd been in it for so many years and nothing was happening. And they started to raise rates, and the president didn't like that because he didn't like higher interest rates. And then the Fed stopped because of the little temper tantrum that the market side had.

11:16And then it was fine again for a while. And now we've got rates not as low as the president wants, so he gets mad. But that's going to happen. It's happened throughout history with presidents and Fed chairs, and they just have to basically take it like Jay Powell has, but still do what needs to be done.

11:34Carol Massar:Bottom line, what will be the role of Jay Powell if he stays on as a governor? As we said, Kevin Warsh passed over in 2017. Do you think it's going to be comfortable? Jay will say what he wants to say? Like, I'm just curious the dynamic. It's going to be very interesting because this is not an ordinary governor. This is the guy who was the chair that everybody expected and looked towards. So if he stays on, it's going to be difficult because if he dissents or if he objects to something that is being done in monetary policy, it's going to carry a lot of weight in the markets and it's going to, to a certain extent, undermine Warsh.

12:10So the question is, does Powell want to be in a position that he might have to do that? He's got to figure out if Warsh is going to be good enough for the Fed that he can escape. But the other thing is this investigation has to end, and the timing has to be right. So it doesn't look like they're buying off Powell and Powell is being bribed to leave. So the sooner they get rid of the investigation, the better if they want Powell out. But I can't believe that the president would do anything that would keep Powell in his seat longer, especially if they can't get Warsh confirmed and can't get him put in there.

12:47Because then that would be the president's fault, and he's got Jay Powell, who he hates, still there because he didn't act.

12:54Carol Massar:Oh, my God. It's like a, I don't know, reality show to some extent, the Fed reality show. Michael McKee, thank you so much. Really appreciate it. Mike's going to be having an interview with Stephen Myron of the Fed a little bit later on at 3 p.m. Wall Street time. So be sure to check that out. We will be carrying that. Katie Kaminsky is still with us. Katie, I do think about something California Governor Gavin Newsom told our Brad Stone, and obviously a Democrat. He's a vocal opponent or critic, if you will, to the president, not shy about stressing his opinion. Having said that, he made a point that there's no rule of law in this administration.

13:32Carol Massar:Again, Gavin Newsom's opinion. But he said the markets kind of keep the president on the straight and narrow. So I'm just curious if you think that's what the bond market believes, that we will have an independent Fed, that it's going to be very careful because the president understands the importance of financial markets. I mean, I would definitely say that today's confirmation shows a little bit of that, or at least this particular nomination, because a lot of people were expecting the extreme scenario, a big shift in general direction. And I think that's where, you know, the market must be playing some role of that because the bond market is one of the few places that's harder for the president to control.

14:18Carol Massar:And really, if we lose the bond market and things get challenging, it can be very difficult. Was that at risk of happening in this process at all? I mean, I think we have seen yields going a little bit higher recently. I don't know if that's a more pro-growth story or whether or not at some point we might be concerned about vulnerability of U.S. bonds. But I do think it's always a risk in this scenario where the Fed has been so conflicted and also where it's really unclear where that's going. So I think we're watching it. It hasn't moved out of range, but you definitely see indications. Just 30 seconds, Katie.

14:58Carol Massar:I mean, it is kind of confusing. the dollar trade, as you said, metals, gold, silver have been on a tear. They're dropping back. Even just looking, and I realize it's the end of the month, but even the equity trade, we still have some buying over the last half hour. It doesn't feel like narratives and trends are yet quite forming or quite formed yet. Yeah, I'd say, I mean, today's not over yet. And yesterday was also a weird day like this where you had copper moving massively as well. I think just the level of volatility that you're seeing in some of these commodity assets is concerning. And it's something that indicates that we're in a very different regime this year than we have been in recent months.

15:40Carol Massar:And I think we'll have to see sort of if this is the top or if we're going to continue to see this type of volatility around commodities going forward. It's bottom line really interesting to say the least. Hey, Katie, thank you so much. Stay warm. Have a good weekend. Katie Kaminsky. She's chief research strategist portfolio manager at Alpha Simplex Group. Stay with us. More from Bloomberg Businessweek Daily coming up after this.

16:10Carol Massar:They told us to expect change. They warned us about the transition. But honestly, they forgot the best part. This is the chapter where we finally focus on us. LifeMD delivers expert menopause and midlife care right from your home. From hormone health to holistic wellness, LifeMD helps you feel your best for the best years of your life. LifeMD, it's just getting good. Visit LifeMD.com slash goodlife. Support for the show comes from Public. Public is an investing platform that offers access to stocks, options, bonds, and crypto. And they've also integrated AI with tools that can assist investors in building customized portfolios.

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18:43Carol Massar:Message and data rates may apply. JPMorgan Chase Bank N.A. Member FDIC. Copyright 2026. JPMorgan Chase and Company. You're listening to the Bloomberg Business Week Daily Podcast. Catch us live weekday afternoons from 2 to 5 p.m. Eastern. Listen on Apple CarPlay and Android Auto with the Bloomberg Business app. Or watch us live on YouTube. Joining us once again in studio, hello. Good to see you. Great to see you. Interesting. Gold funds. I mean, gold and silver, the move that we're seeing today. Gold funds, it's in your DNA, has been for decades. What do you make of kind of the trade that we're seeing here?

19:19Carol Massar:Is it just all about what we're seeing in the dollar trade coming off of the Fed announcement? Yeah. I mean, in the short term, I say this is the hardest bull market to trade, the gold bull market. So in 2023, we started pounding the table to buy gold. No one wanted to listen, right? Because gold sort of had a horrible decade after the financial crisis. And now it's run up so much. And people were constantly, our clients were like, I missed it, I missed it, I missed it, right? And then you had this technical blow off. And it's going to correct, right? We think it could correct to 3 ,800, you know, which would be the 200 moving average day support.

19:56It's down 15 % now. I think it's in a multi-year bull market. don't focus on all the short term, but people are going to get psyched out. And when it does correct the 3 ,800, no one's going to be talking about gold and it's going to be impossible to convince them to buy. But the deep fundamentals are still there. And what are they? They are that the United States has a fiscal spending problem. We've talked about that before. We don't need to get into the details. We've got unpredictability on tariff policies and a bunch of foreign policy, maybe even military action in the Mideast, right? All that's happening.

20:29And we've weaponized our financial system or we've weaponized the dollar, right? When we took Russia's reserves during the Ukraine invasion. So people want gold, something they can hold. Countries want that. And the developed markets who are getting richer year after year, month after month are buying more gold. So that's why we see this a long ways to go. Why is gold the right asset to hold in an environment as you describe? Well, countries want it because if they put it in their vaults, it doesn't matter what the current U.S. president thinks about them. It's untouchable. And it's also, you know, 100 years ago, the world financial system centered around gold.

21:07And my argument is the world economy is becoming diverse just like it was 100 years ago. I like to talk about the rise of India a lot. Just it's going to be as important in the next 10 years as the rise of China.

21:19Carol Massar:Just signing a big trade agreement. Right. And right with Europe. And they're not dollarized economies. So what are they going to buy? Gold is the world's leading currency. It's a paradigm shift. So is the era of the U.S. dollar over? It's the dollar plus gold. And, you know, again, if you're looking at India, you're looking at China, they don't want a dollarized economy. Right. And what's their second best? China would like not like it either. And they've been trying right to get their own currency be much more of a global currency but it's been i don't think anyone's going to win as the next global currency i think it's going to be gold by default interesting tell me about the flows that you've seen in your gold funds and then we want to expand out uh to some of your other funds is this money been flowing in like crazy so that's part of my thesis not a lot in in context so last year there was very little gold buying in the u.s Gold was going straight up, basically.

22:12Very little gold buying until the second half of the year. There's been a ton of bullion buying in the last month or so. In our gold shares fund, no one talks about gold shares. There were net redemptions last year, about$4 billion. And we just got inflows yesterday. But in the ETF world, sometimes you get inflows when people want to short it. And I think that was a very smart investor worried about the sell-off. Well, let's transition a little bit. Gold is certainly of interest to us, but energy. is also of interest to us. I was actually thinking about this earlier today, not just the fact that we talk about energy demand when it comes to AI and data centers, but also just the cold weather that we've been seeing.

22:50And you've seen commodities rally as a result of some of that. When it comes to AI, when it comes to the trade related to AI, you're very bullish on uranium. You're very bullish on other ways to power the US moving forward. Where are you seeing those flows and why? Right. Well, we've got two things going on. We've got this multi-year shortage of electricity in the United States driven by AI data center demand. So everyone who's moving towards that electricity trade is getting rewarded in their equity prices. And then on top of that, we had some news out of China. Maybe it's not real that they may do some stuff to alleviate their housing problem.

23:29problem. If they do that, right? And they call it Dr. Copper. That's the next metal I would focus on, Tim. And Dr. Copper is like a sign of the health of the economic growth. And I mean, copper has also had a little bit of a crazy run up. But I think the fundamentals are what you talked about. The new world of AI, electrification needs the old world. It needs natural gas, it needs gas turbines, it needs construction, all that kind of old world stuff. And if you get China even showing some signs of life, you've got a good economy and good demand for the old world.