Kevin Warsh's Fed "Regime Change" Could Sink the Stock Market, and the Blame Lies With President Trump

Warsh says the Fed is making decisions based on outdated models that fail to account for the deflationary impact of artificial intelligence.

Warsh thinks AI-driven productivity gains, coupled with a reduction in the Fed’s balance sheet, leave room for lower interest rates.

Trump's decisions have put Warsh in a tough spot: Rate cuts would raise questions about Fed independence that could sink the stock market.

The S&P 500 (SNPINDEX: ^GSPC) returned 12.7% annually under former Federal Reserve Chair Jerome Powell, its best performance under any chairman since Paul Volcker took the position in 1979. Yet President Trump repeatedly criticized Powell and other Fed officials for keeping interest rates too high.

The president's attempts to influence monetary policy didn't stop at verbal attacks. Since Trump returned to office, the Justice Department has launched criminal investigations into Powell and Fed Governor Lisa Cook, moves that many economists warn could erode trust in the central bank.

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Enter Kevin Warsh, a former Fed governor who has argued for lower interest rates since last year. "We can begin reform at the Fed with a rate cut, which is just the first step to regime change," he told CNBC in July 2025. Warsh officially replaced Powell as Fed chair in May after securing Trump's nomination earlier this year.

However, Warsh's plans for a regime change in the conduct of monetary policy have been complicated by Trump's attacks on the Fed and his decision to wage war in Iran.