Heavyweight hearing tomorrow night: Will Waller be hawkish? Deutsche Bank reveals five key points.

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At 10:00 a.m. ET on April 21, Federal Reserve Chairman nominee Kevin Warsh will attend a Senate Banking Committee hearing. For investors, this is not only a personnel confirmation, but also a key window to judge whether he will “turn hawkish.” Understanding Warsh’s policy stance is the primary prerequisite for anticipating the future direction of U.S. monetary policy.

According to Chasing Wind Trading Desk, Deutsche Bank’s latest report outlined five core points of concern regarding this hearing, the most important being how Warsh balances the “long-term vision of rate cuts” with the “short-term reality of inflation.” Warsh had previously supported rate cuts based on the logic of “deregulation and AI-driven deflation,” but the current stabilization of the labor market, unexpected rise in PCE inflation, and increased risks from the Middle East have significantly changed the macro environment. Considering that he is not structurally dovish, it is expected that he will avoid forcefully advocating for rate cuts in the near term during the hearing.

Additionally, Deutsche Bank noted that Warsh’s stance on issues such as the balance sheet, communication framework, and Federal Reserve independence are equally critical. He advocates for a smaller balance sheet, questions the effectiveness of forward guidance, and criticizes the Fed’s “mission drift.”

Citi believes that any statements Warsh makes regarding monetary policy or the Fed’s role could be quickly reflected in asset prices. Treasury Secretary Bentsen said this week that he “understands the Fed may need to wait before cutting rates,” giving Warsh some leeway, but the market is still waiting for a clear policy anchor.

Meanwhile, the nomination process is facing political resistance. Republicans have only a one-vote majority on the Senate Banking Committee, and Senator Tillis has pledged to oppose the nomination until the Justice Department completes its investigation into the Fed building renovation case. This could delay Warsh’s confirmation process; if he is not approved in time, Powell will serve as acting chairman. This means there is still uncertainty about whether Warsh will ultimately take the helm of the Federal Reserve.

Rate Cut Stance: How to Balance "Long-Term Vision" and "Short-Term Reality"?

The main focus on Warsh at the hearing is whether he will continue to strongly advocate for rate cuts or turn hawkish due to recent data.

Previously, Warsh’s theoretical basis for supporting rate cuts was mainly based on the prediction that “deregulation and artificial intelligence would bring significant deflationary effects.” But the current economic environment has changed: the labor market has stabilized, PCE inflation has risen above expectations, and the Middle East situation has further increased inflation risks. These factors have clearly diminished the urgency for rate cuts.

The Fed’s internal stance has also turned more hawkish accordingly. At the March meeting, “some” officials believed the policy outlook should use more “two-way language,” no longer unilaterally emphasizing rate cuts. Market pricing is also cautious, currently only implying about 8 basis points of rate cuts this year. It’s worth noting that Warsh is not a structural dove—during the global financial crisis he warned of the inflationary risks of QE and did not support the 50-bps rate cut in September 2024. Against this background, if he leads a committee increasingly inclined to maintain stable rates, the likelihood of a strong push for rate cuts in the short term is low.

The real key is how Warsh balances the vision of “wanting a rate cut in the long term” with “the reality of having no need for a rate cut in the current environment.” He may adopt language such as “vigilantly monitoring short-term inflation risks, and relaxing policy at a later time,” to seek a balance between long-term goals and short-term constraints.

Balance Sheet: "Rapid Slimming" or "Gradual QT"?

Whether Warsh will support the “ample reserves” framework and accept the consensus of “reform bank regulation first, then gradually shrink the balance sheet,” is the second core focus of the hearing.

Warsh’s significant difference from other candidates is his public stance that the Fed should maintain a smaller balance sheet. The logic: shrinking the balance sheet reduces the money supply and tightens overall financial conditions, thereby suppressing inflation and creating room for future rate cuts.

Although this stance caused heated discussion when he was first nominated, the market has gradually reached a consensus that shrinking the balance sheet will require a long process, and the precondition is to reform bank regulation to reduce reserve needs. This approach has been supported by several Fed officials, including Vice Chair for Supervision Bowman, Governor Milan, and Dallas Fed President Logan. The market will be watching to see if Warsh recognizes this more gradual pace of balance sheet reduction.

Another key question: Will Warsh continue to use the “ample reserves” framework, or lean toward returning to “scarce reserves”? Deutsche Bank believes that, he may call for a comprehensive review of the Fed’s balance sheet and policy implementation, but any substantial adjustments may take years to materialize.

For about 15 years, Warsh has consistently criticized the Fed’s overuse of balance sheet tools. While he supported the initial launch of quantitative easing (QE) during the global financial crisis, he warned that subsequent QE programs were inappropriate, could drive up inflation, exacerbate financial stability risks, and divert the Fed from its core mission into potentially distorting credit allocation policies. As he said recently:

“In the summer and fall of 2010, economic growth was strong and financial stability was sound, and I was very concerned that further Treasury purchases would drag the Fed into the messy political business of fiscal policy. When QE2 was eventually announced, I disagreed with the decision, and soon after resigned from the Fed.”

Regarding portfolio composition, the Fed is currently reducing its MBS holdings by reinvesting proceeds into Treasuries, and may further accelerate this process through direct sales in the future. The Committee has yet to determine the steady-state target for its Treasury portfolio. If Warsh ultimately leads the Fed, he may prefer a portfolio with significantly shorter duration than the overall market. Regarding future QE, it is almost impossible for the Committee to abandon this effective policy tool at the zero lower bound, but it may adopt different purchase structures to address market dysfunction.

Communications Framework: Farewell to "Fine-Tuned Forward Guidance," Embracing "Long-Term Narrative"?

Whether Warsh will reiterate his criticism of the Fed’s communication strategies and tools, and propose specific reform plans, is the third core focus of the hearing.

Warsh has long questioned the use of forward guidance in normal times, believing its potential costs—damaged credibility and reduced flexibility—outweigh the benefits. It is expected that he will maintain this criticism and promote a reduction in the fine use of forward guidance.

Although he has reservations about the dot plot (SEP), completely cancelling this tool would be difficult to gain sufficient support within the Committee. More feasible reforms include adopting a rolling forecast window, focusing on the central tendency or range of forecasts instead of individual dots, or embedding the dot plot within a broader risk and scenario analysis framework.

Warsh will very likely retain post-meeting press conferences, but reposition them from platforms signaling short-term, data-dependent policy signals to ones conveying a long-term, narrative-driven economic perspective. In the short term, he may focus on the theme of a “productivity boom.”

In terms of communication subjects, although he wishes to convey a more concise “single voice” message, institutional and political realities mean dramatically limiting the public statements of regional Fed presidents is neither realistic nor desirable, as it could trigger concerns about the Fed’s independence and have the opposite effect.

Independence: How to Choose Between "Political Pressure" and "Central Bank Credibility"?

Whether Warsh unconditionally supports Fed independence and maintains distance from government calls for “large scale rate cuts” is a key focus at the hearing.

Although Warsh has described Fed independence as a “worthy” cause in his past remarks, he has also pointed out that the Fed’s own performance has weakened the justification for its independence. He believes the Fed’s role is overly large and performance lacking, condemning its “mission creep”—including involvement in issues like climate change and inclusivity.

Like any new chair, Warsh will need to win market trust in his ability to achieve the inflation target through actual actions. The current environment is especially difficult: inflation has been above target for five consecutive years, recent oil price surges have brought new price shocks, and the president has made clear demands for large rate cuts. Based on this, Warsh is very likely to deliberately emphasize the importance of independence and maintain distance from the administration’s calls for rate cuts.

Personnel & Nomination: The “Hot Potato” of DOJ Investigations and Powell’s Stay

Whether Warsh will comment on the Justice Department’s investigation into the Fed, and whether Powell would remain as governor after his chairman term ends, are other hearing focuses.

A key current variable is the nomination timeline. Senator Tillis has recently reiterated that he will block all nominations until the Justice Department’s investigation of Powell is concluded. Therefore, Warsh will likely be asked about this investigation. He is expected to decline comment, to balance between government support and the Fed’s stance.

Relatedly, Warsh may also be asked whether Powell will stay on as a governor after his chairmanship ends—Powell has so far not ruled out this possibility, while Trump administration officials are critical of it. Given that, if approved, Warsh would need to effectively lead a committee possibly including Powell, he is unlikely to state a strong opinion on Powell’s stay or departure plans.

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