3 Ways Kevin Warsh Aims to Reshape the Federal Reserve -- and They Can All Decimate Wall Street
This has been a historic month for Wall Street in more ways than one. In addition to the Dow Jones Industrial Average (DJINDICES: ^DJI) , S&P 500 (SNPINDEX: ^GSPC) , and Nasdaq Composite (NASDAQINDEX: ^IXIC) closing at record highs on May 28, we've witnessed a rare changing of th
This has been a historic month for Wall Street in more ways than one. In addition to the Dow Jones Industrial Average (DJINDICES: ^DJI) , S&P 500 (SNPINDEX: ^GSPC) , and Nasdaq Composite (NASDAQINDEX: ^IXIC) closing at record highs on May 28, we've witnessed a rare changing of the guard at America's foremost financial institution, the Federal Reserve.
May 15 marked the final day of Jerome Powell's second term as Fed chair , paving the way for President Donald Trump's handpicked nominee, Kevin Warsh, to grab the reins. On May 22, Warsh was officially sworn in as only the 17th head of the Fed since its creation in December 1913.
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Warsh brings more than five years of experience to the position, having previously served on the Board of Governors and as a voting member of the Federal Open Market Committee (FOMC) from Feb. 24, 2006, to March 31, 2011. But experience isn't everything when it comes to pleasing Wall Street.
The new Fed chair has been outspoken about his desire to reform the central bank. He's laid out three proposals that, if enacted, can have dire consequences for Wall Street.
Among the several changes proposed by Warsh before being sworn in, perhaps none looms larger than his desire to "get out of the fiscal business."
Specifically, the new head of the Fed has been critical of his predecessors allowing the central bank to be an active market participant well beyond a crisis event (e.g., the financial crisis). Between August 2008 and March 2022, the Federal Reserve's balance sheet, composed primarily of long-term Treasury bonds and mortgage-backed securities (MBS), grew approximately tenfold to nearly $9 trillion. Following a period of quantitative tightening, this balance sheet currently stands at a shade over $6.7 trillion.
Warsh would prefer the central bank to be a passive observer rather than actively influence markets through its bond and MBS purchases. But to "get out of the fiscal business," the Fed would have to sell most of its balance sheet assets -- and this comes with potentially serious consequences for Wall Street.
