On Thursday, President Donald Trump said he would announce his pick for chairman of the U.S. Federal Reserve to replace outgoing Chairman Jerome Powell after the latter’s term ends in May.
Although nothing is confirmed yet, reports suggest that the Trump administration is preparing to nominate Kevin Warsh, who served on the Federal Reserve Board of Governors from 2006 to 2011.
Warsh has sometimes praised cryptocurrencies. However, bitcoin plunged late Thursday to nearly $81,000 as its odds rose on betting sites, with some analysts now viewing it as a bearish force for the asset.
“Markets generally view the resurgence of Warsh’s influence as bearish for Bitcoin, as his focus on monetary discipline, higher real rates, and reduced liquidity frames the crypto not as a hedge against devaluation but as a speculative excess that fades when easy money is withdrawn,” Markus Thielen, founder of 10x Research, told CoinDesk.
Higher real interest rates mean that the real cost of borrowing, after accounting for inflation, is high. Think of it as the “real” interest rate that hits your finances the hardest. When real rates are high, companies and investors generally reduce their exposure to risky investments such as Bitcoin.
Warsh’s background adds fuel to the fire. During the global financial crisis (GFC) which lasted from December 2007 to June 2009, Warsh repeatedly spoke about the risks of inflation even as the global economy was on the brink of full-blown 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, when the Fed’s preferred inflation measure was 0.8% and the unemployment rate was 9%, he said, “I continue to be more concerned about upside risks than downside risks.” »
Over the years, many observers have argued that Warsh’s hawkishness and failure to recognize deflation risks exacerbated the crisis.
“From this perspective, his approach would likely have led to higher unemployment, slower recoveries and greater risk of deflation during the 2010s,” Thielen said.
All of which makes Warsh’s potential choice equally ironic, as the former Fed governor’s hawkish record stands in stark contradiction to Trump’s pro-risk asset stimulus plan. Trump has criticized Powell repeatedly, often resorting to personal attacks for keeping rates high and killing the economy. The president stressed the need for a rapid reduction in interest rates, calling for interest rates to be as low as 1% from the current window of 3.5% to 3.7%.
Therefore, many observers believe that Warsh is not a good choice for the Fed, which is expected to follow Trump’s line.
“Kevin Warsh has been a monetary policy hawk throughout his career and, especially, at a time when labor markets were collapsing. His dovish stance today comes from convenience. The president risks being misled,” Renaissance Macro Research said on X.
“I read the FOMC transcripts during the global financial crisis. His quotes scared me,” said Ana Wong, chief U.S. economist at Bloomberg.
Fortunately, even as Fed chairman, Warsh cannot dictate rates alone, because the Board of Governors votes collectively, diluting any single voice. It remains to be seen whether Trump moves forward with Warsh.
Until then, its hawkish past could continue to spook risk assets, strengthening the dollar in the meantime.
