The Rabobank analysis suggests that a Kevin Warsh-led Federal Reserve would mark a significant departure from the policies of his predecessors, particularly in how the central bank communicates and manages its balance sheet. While he is expected to deliver the rate cuts President Trump desires, his approach would be far from dovish in other critical areas.
The Core Thesis: The most profound changes under a "Warsh Regime" would not be on the federal funds rate, but in the Fed's balance sheet policy and its communication strategy.
Key Points Rephrased and Highlighted
A "Least Dovish" Dove on Rates: Warsh has pivoted from his past as an inflation hawk to embrace Trump's push for lower rates, using arguments like a "housing recession" and AI-driven productivity. Rabobank forecasts three 25bps rate cuts in 2026, just one more than market pricing. The key insight is that in any policy doubt, Warsh is likely to push for a cut, and he may even try to convince the FOMC that the "neutral" interest rate is lower than currently believed.
The Real Revolution: Shrinking the Fed's Footprint: Warsh's "theory of economic imprinting" posits that the Fed's crisis interventions have become permanent and harmful. Therefore, his primary goal is a significant reduction of the Fed's balance sheet, moving away from the "ample reserves" regime that has existed since 2008.
Navigating the "Scarce Reserves" Transition: Reducing the balance sheet could force a return to a "scarce reserves" system. This would be a tectonic shift in how monetary policy is implemented, potentially spiking money market rates and requiring the Fed to revert to temporary open market operations to control the federal funds rate—a throwback to pre-2008 methods. This transition period is fraught with risk of major market disruption.
The Balance Sheet Tightrope: Assets vs. Liabilities
Asset Side Risk: As the Fed sells or stops reinvesting in Treasuries and MBS, it removes a major source of demand. Warsh believes that the resulting upward pressure on longer-term yields can be offset by cutting short-term policy rates. The report questions whether this would be sufficient, warning that a rising term premium could undermine this strategy.
Liabilities Side Solution: To make balance sheet reduction feasible, the report highlights an argument from Trump ally Miran: deregulation. By easing bank liquidity and capital requirements (like the eSLR), the demand for holding reserves would fall, theoretically allowing the Fed to shrink its liabilities without causing a funding crisis.
A Communications Revolution: The End of Forward Guidance: Warsh is highly critical of the communication style of the Bernanke-Yellen-Powell era. He reportedly sees no role for forward guidance, data dependence, or frequently changing Fed metrics. The report suggests he prefers a return to a more Greenspan-esque, opaque style of communication, which would introduce a new element of uncertainty for markets accustomed to the Fed "telegraphing" its moves.
In conclusion, the Rabobank report paints a picture of a Fed under Warsh that is marginally dovish on rates but operationally hawkish, willing to risk market turbulence to shrink its footprint and fundamentally alter how it talks to the world.
