Will Walsh trigger the next financial crisis?

Martin Wolf, chief economics commentator at the UK’s Financial Times, has just published a highly cautionary article focusing on Kevin Warsh, who may soon take the helm of the US Federal Reserve. The headline bluntly asks: What exactly are we seeing when we interpret the "Warsh era Fed"?

Wolf is an authority in macroeconomics. He has long focused on issues of central bank independence and the boundaries between fiscal and monetary policy, and after the 2008 financial crisis, his perspectives significantly influenced policymakers and markets alike. This time, he turns his attention to Trump’s chosen candidate for Fed chair, attempting to find clues to the future direction of monetary policy based on Warsh’s past remarks and his recent change in stance.

The article opens with a sharp question: If Warsh is confirmed as Fed chair, will he be an inflation hawk, or Trump’s "lapdog"? This question has basis. Warsh’s shifting positions on monetary policy and his views on the broader responsibilities of the Fed show him as a hardliner. Yet his recent comments on inflation prospects—and the very fact that Trump picked him—point to the opposite.

A deeper worry lies in whether Warsh is someone of conviction and judgment, or a political weather vane. Supporting loose monetary policy under a Republican administration, but tightening under a Democrat—such a "double standard" could bring unpredictable risks to the US and global economy. Wolf warns that, "under Warsh’s policy framework, the consequence may be another financial crisis."

The Past and Present of a "Hard Currency" Believer

Judging by Warsh’s public statements, he does come across as a classic "hard currency" central banker. Wolf cites Warsh’s speech to the New York Shadow Open Market Committee in March 2010: the US economy was still grappling with the deep recession post-2008, yet Warsh was already expressing concern over the Fed’s credibility.

In that speech, Warsh presented four core points. First, the Fed’s independence applies only to monetary policy—not "regulatory policy, consumer protection, or other responsibilities delegated to the Fed." Second, the Fed "as first responder, must strongly resist the temptation to become the ultimate rescuer." Third, "Governments may try to influence the central bank to keep monetary policy easier for longer, to finance debts and stimulate activity." But "the only reputation a central banker should seek, if any, is to be remembered in the history books."

The fourth point is the most crucial. Warsh emphasized: "It took central banks decades to bring inflation down to a level consistent with price stability. We must not risk these hard-won achievements." Such a nearly dogmatic anti-inflation stance was harsh, especially given the economic conditions at the time.

Stance in 2025: Continuity or Camouflage?

On the surface, today’s Warsh seems intellectually indistinguishable from the Warsh of 2010. In his April 2025 speech to the International Monetary Fund, he not only stressed the issue of "institutional drift" at the Fed, but criticized its "failure to fulfill the key statutory mandate of price stability."

Warsh’s criticism is sharp. He points out that the Fed "facilitated the explosive growth in federal spending," and "the Fed’s excessive role and poor performance have undermined the valuable rationale for monetary policy independence." His cutting complaint: "Since 2008, the Fed has been the main buyer of US Treasury debt."

He further expounds: "Fiscal dominance—where national debt constrains monetary policymakers—has long been considered a possible endgame by economists. My view is that monetary dominance—where the central bank becomes the ultimate arbiter of fiscal policy—is a clearer and more realistic danger." For Warsh, loose monetary policy is the road to ruin.

Why Did Trump Choose This "Contradiction"?

This raises a puzzling question: Trump himself is the embodiment of "fiscal dominance," often blasting current chair Powell as a "moron" for not cutting rates faster. So why appoint a seemingly tough anti-inflationist as Fed chair? Beyond Warsh’s "good looks," there must be deeper reasons.

Wolf analyzes several possibilities. First, Trump may welcome Warsh’s antagonism toward what he sees as the Fed’s "woke" overexpansion. Second, he may like Warsh’s tendency to deregulate finance. Third, Warsh is a relatively orthodox choice whose appointment calms nervous markets (so far, it has).

But crucially: Warsh has "conveniently" concluded that inflation is no longer a threat, thanks to tech-driven productivity growth. This assessment could be correct—as Warsh himself notes, former Fed chair Greenspan made similar bets on the impact of the internet in the 1990s. But for someone worried about inflation in the depths of recession in 2010, it’s a bold pivot. Wolf comments: "If he gets his way, he would replace the Fed’s 'data dependence' with intuition. Considering America’s huge fiscal deficit, debt, and rapid growth, this would be a big gamble."

What Would a Warsh Tenure Bring?

Wolf admits he actually agrees with some of Warsh’s criticisms of the Fed, especially regarding its drift from core functions. He also concurs that post-pandemic inflation was, to some extent, the Fed’s fault: together with other central banks, it failed to consider that the 2020 surge in money supply could drive prices sharply higher. He also agrees the post-2020 backward-looking monetary policy framework "was conceptually and practically flawed (not to mention terribly timed)."

As an institution, the Fed is also reassuring. As Wolf notes, it is much more than just its chair. Leadership matters, but Warsh cannot easily override the FOMC or even the staff, at least not in the short term.

Are the Seeds of Crisis Already Sown?

Nonetheless, concerns remain, centering on two points. First, Warsh may be too willing to defend anything Trump wants, even if that means fully embracing fiscal dominance. More worryingly, he seems intent on reconciling this by: aggressively shrinking the Fed’s balance sheet while offsetting lower short-term rates with higher long-term rates.

Meanwhile, the US Treasury will likely further shift to short-term financing, steepening the US yield curve, possibly resulting in increased demand for short-term dollar funding and reduced long-term demand. Wolf warns the key risk is, "given falling bank reserves and deregulation, the financial sector’s balance sheets will become more fragile."

The incentive to hold dollars may weaken as short-term rates drop and inflation fears rise. Wolf’s conclusion is sobering: "The result could be another financial crisis." This is not alarmist. History shows crises often stem from policy contradictions: on one side, fiscal expansion and regulatory relaxation; on the other, the facade of monetary discipline—systemic risk quietly builds up until a trigger sets off the chain reaction.

What Kind of Fed Chair Does the Market Need?

In the final evaluation, Wolf gives a cautious but clear verdict: "Yes, Warsh is better than many other candidates. But he is a confusing, perhaps self-confused figure." It’s a pointed judgment—a central banker of erratic stance may be more dangerous than one who is stubborn yet wrong, since stable expectations cannot form among market participants and the economy.

Wolf emphasizes: "The US and the world need a Fed chair who can say no to Trump." He praises incumbent Powell as "one who has already proven to be such a person." The article closes with an open question: "Will Warsh be that kind of chair?"

The answer may not become clear until the next bout of economic or financial turmoil. By then, the price may already have been paid. As the headline hints, whether the next round of financial crisis is triggered by Warsh will depend on whether he chooses to be a principled central banker, or a persuasive self-justifier serving politics. At present, the signs are not optimistic. History tells us that when the independence of monetary policy is eroded, and short-term political priorities overwhelm long-term economic stability, the fragility of the financial system rises sharply. At such an uncertain moment, perhaps we should recall what Warsh said in 2010: the only reputation a central banker should seek "is to be remembered in the history books"—the question is, what will he be remembered for?

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