On Thursday, President Donald Trump said he will announce his pick for U.S. central bank chief to replace incumbent Jerome Powell after the latter’s term ends in May.
While nothing has been confirmed yet, reports suggest the Trump administration is preparing to nominate Kevin Warsh, who served on the Federal Reserve Board of Governors from 2006 to 2011.
Warsh has occasionally praised cryptocurrencies. Another bitcoin dipped to near $81,000 lows late Thursday as his odds rose on betting sites, with some analysts now pointing to him as a bearish force for the asset.
“Markets generally see a resurgence of Warsh’s influence as bearish for Bitcoin, as his emphasis on monetary discipline, higher real interest rates and reduced liquidity frameworks crypto not as a hedge against deterioration, but as a speculative profit that disappears when easy money is withdrawn,” Markus Thielen, founder of 10x Research, told CoinDesk.
Higher real interest rates mean that the actual cost of borrowing money after accounting for inflation is increased. Think of it as the “true” interest rate that hits your finances harder. When real interest rates are elevated, companies and investors typically reduce exposure to risky investments such as bitcoin.
Warsh’s track record adds fuel to the fire. During the Global Financial Crisis (GFC), which lasted from December 2007 to June 2009, Warsh repeatedly cited inflationary risks, even as the global economy teetered on the brink of outright deflation.
For example, in September 2008, the month Lehman Brothers collapsed, Warsh said, “I’m still not ready to let go of my concerns on the inflation front.”
Seven months later, with the Fed’s preferred inflation target at 0.8% and unemployment at 9%, he said: “I remain more concerned about upside risks to inflation than downside risks.”
Over the years, many observers have argued that Warsh’s hawkishness and failure to recognize deflationary risks exacerbated the crisis.
“From this perspective, his approach would likely have resulted in higher unemployment, slower recovery and greater deflation risk during the 2010s,” Thielen said.
All of which makes a potential Warsh pick equally ironic, as the former Fed governor’s hawkish record clashes sharply with Trump’s reflationary, pro-risk asset playbook. Trump has repeatedly bashed Powell, often resorting to personal attacks to keep interest rates high and kill the economy. The president has emphasized the need for rapid rate cuts, calling for rates to be as low as 1% from the current window of 3.5%-3.7%.
That’s why several observers say Warsh is the wrong choice for the Fed, which is expected to toe Trump’s line.
“Kevin Warsh has been a monetary hawk his entire career and most importantly, at a time when the labor markets fell out of bed. His prowess today stems from convenience. The president risks being duped,” said Renaissance Macro Research at X.
“I read the fomc transcripts during the GFC. His quotes scared me,” said Bloomberg’s chief US economist Ana Wong.
Fortunately, even as Fed chairman, Warsh cannot dictate rates alone, as the Governing Council votes collectively, diluting any individual vote. It remains to be seen whether Trump will move forward with Warsh.
Until then, his hawkish story can continue to spook risk assets and strengthen the dollar in the meantime.
