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Overview
30 January 2026, 22:35 UTC
Rapid policy changes in 2026 would be unlikely
with Chair Warsh
Blog
Andrew Dubinsky, US Economist, UBS Financial Services Inc. (UBS FS) Jason Draho, Head of Asset Allocation, CIO Americas, UBS Financial Services Inc. (UBS FS) Leslie Falconio, Head of Taxable Fixed Income Strategy, CIO Americas, UBS Financial Services Inc. (UBS FS) Kurt Reiman, Head of Fixed Income, Americas, UBS Financial Services Inc. (UBS FS)
The Warsh nomination news is meaningful, but not transformative for the
Fed outlook in the near term, in our view.
Warsh to succeed Jerome Powell as the next Chair of the Federal Reserve
Board when Powell’s term as chair ends in May. The timing of the upcoming confirmation is uncertain because Senator Thom Tillis has pledged to block all Fed nominees until ongoing legal matters involving Chair Powell are resolved. This procedural hurdle could delay Warsh’s arrival and extend Chair Powell’s influence on the FOMC. It is also unclear whether Warsh will replace Governor Miran—currently the most dovish member of the Fed—or whether Powell himself steps down. Those personnel outcomes affect how fast the composition of the Fed moves in a dovish direction.
The Warsh nomination is meaningful, but not transformative for the Fed
outlook in the near term, in our view. His dovish views on the economy, preference for a smaller balance sheet, and uncertain path to building a policy consensus suggest he is unlikely to immediately alter the near-term trajectory of policy rates. For now, the data remains in the driver’s seat — market-implied Fed rate cuts in 2026 changed only modestly today after the announcement, rising from 1.8 cuts at the market close on Thursday to 2.1 by Friday afternoon. The longer-term outlook for Fed policy is more uncertain, with the possibility that Warsh will eventually advocate for larger rate cuts. The 3bps rally in the two-year Treasury yield today that resulted in a steeper yield curve is suggestive of that scenario, the front-end rally contributed to the 10-year two-year yield curve steepening 4bps today.
Warsh has a reputation of being a hawk, but his recent comments show
he’s embraced a more dovish view on the economic outlook. He developed a reputation as a hawkish FOMC member during his time as a Fed governor (2006-2011) under Chair Bernanke. He remained concerned about upside inflation risks through the fall of 2008, which failed to materialize. However, Warsh’s current views appear rooted in his belief that AI-driven productivity gains will be a powerful disinflationary force. He has also emphasized that tariff driven price pressures are largely one-off distortions that should be ignored, reinforcing his view that the medium-term inflation trend should improve. This report has been prepared by UBS Financial Services Inc. (UBS FS). Please see important disclaimers and disclosures at the end of the document.
Consistent with this dovish bias, Warsh has recently stated that the Fed
can lower rates “a lot.” However, this push for lower short-term rates is often paired with a preference for a smaller balance sheet. Put another way, greater balance sheet reduction may be necessary to implement larger cuts to policy rates. In his framework, balance sheet discipline is a way to discourage irresponsible fiscal behavior.
Implementing rapid policy change could be difficult for the new Fed chair if
confirmed. Warsh would still need to secure a majority of support from the 12-member FOMC, a committee where consensus-building has historically been essential to maintaining policy credibility. His preference to reduce the size of the balance sheet is an idea with some existing FOMC support.
However, current banking regulation affects the demand for bank reserves
which, in turn, prevents the Fed balance sheet from contracting in the near term. Regulatory changes that alter this dynamic are unlikely to happen quickly. The pace of policy change will also be influenced by Board turnover. Powell could elect to remain a governor, and Supreme Court arguments in the Governor Cook case indicate she is not leaving soon.
While it was a highly volatile day for some asset classes, the bond market
had relatively little reaction to the announcement of Kevin Warsh as the new Fed nominee. The upcoming data, particularly next week’s jobs report, will remain the focal point. While Warsh has turned notably more dovish than his hawkish track record, his ability to impact the performance of the real economy relies heavily on his ability to build a consensus and persuade other Fed members. CIO anticipates two rate cuts in 2026, in June and September. While Warsh will likely support those cuts, his prior public comments indicate a reticence to use the balance sheet to influence the longer end of the yield curve, outside of an emergency. However, given his history as an inflation hawk, the increase in back-end yields is likely capped, and a bear steepening yield curve moderated.
While Warsh has been vocal about making more fundamental changes to
the Fed, we do not see such potential changes as a current market driver.
