Author: Jae, PANews

At 11 p.m. Beijing time on May 22, Kevin Warsh, with his hand on the Bible, was sworn in as the 17th Chairman of the Federal Reserve in the presence of Supreme Court Justice Thomas, officially taking over the helm from his predecessor, Jerome Powell, who had led the ship for eight years.

Fifteen years later, this former governor, who had resigned in protest against quantitative easing, returned to the Federal Reserve and seized supreme power.

Unlike previous chairmen who were inaugurated at the Federal Reserve headquarters, this year's swearing-in ceremony was held at the White House. The last time such a ceremony was held outside the Federal Reserve headquarters and at the White House with the president personally present was in 1987 when Reagan presided over Greenspan's inauguration. This also broke with the decades-long tradition of the Federal Reserve deliberately maintaining physical distance from the White House.

Interestingly, during Warsh's swearing-in ceremony, US President Trump delivered a declaration of "independence": the government would fully support Warsh's work, and the Federal Reserve would make its own decisions. This seemingly authoritarian statement actually foreshadowed the policy maneuvering within the new Federal Reserve.

Outside the White House, the sky is blue and the weather is fine, but the stagflation cloud hanging over the US macroeconomy lingers. All capital market players are hesitant: can Warsh, who is advocating for "reshaping the Federal Reserve," replicate Greenspan's success 30 years ago and leverage the AI revolution to break free from the shackles of inflation?

Both Greenspan and Walsh reached a technological turning point, riding the wave of the times, while Walsh struggled with stagflation.

To understand Walsh's thinking, one must first clarify the two eras in which he and Greenspan lived: similar technological dawns, but vastly different economic environments.

The 1990s were a golden age for the American economy, known as the "Great Stability." The Cold War had ended, the benefits of globalization were flowing in, and the global geopolitical landscape was relatively peaceful. The personal computer and internet revolution swept across the world, technological dividends permeated the very fabric of the economy, corporate efficiency soared, and marginal costs plummeted. Inflation hovered at a moderately low level, and the Federal Reserve enjoyed near-absolute independence, with monetary policy unhindered by politics. Greenspan stood at the forefront of this era, with a stable and fertile ground beneath his feet.

Currently, Walsh's path is fraught with difficulties and hidden dangers. Although it is also a turning point in technological revolution, with generative AI ushering in large-scale applications, echoing the early days of the Internet, everything else is a different story.

The CPI climbed to a three-year high of 3.8%, exceeding the 2% target for five consecutive years, showing stubborn stickiness; the Iran war triggered a Middle East crisis, with oil and gas prices surging by 50%, and the risks of imported inflation and supply chain disruptions remained high; the Trump administration intervened aggressively, publicly pressuring for interest rate cuts, and the independence of the Federal Reserve faced an unprecedented challenge; the $6.7 trillion balance sheet is a "liquidity dam" left by Powell, far exceeding the size of the Greenspan era.

One is a favorable environment of technological dividends, low inflation, and stable growth; the other is an adverse environment of emerging technological advancements, looming stagflation, and political interference. The current Federal Reserve is forced to find a difficult balance between combating inflation and preventing an economic recession, which means that every monetary policy decision Warsh makes carries extremely high costs for error.

The "AI bet" is rife with disagreements, and radical policies are stirring up the bond market.

Despite the vastly different historical contexts, Warsh's policy narratives and ideas for Federal Reserve reforms reveal a clear homage to Greenspan: both bet on technological dividends and attempted to rewrite the underlying logic of inflation and growth through supply-side reforms.

In the mid-to-late 1990s, Greenspan put forward the sensational "Internet hypothesis": the productivity leap brought about by the Internet is enough to support high-speed economic growth without causing inflation.

Today, Warsh attempts to replicate this logic, only changing the protagonist to AI. He repeatedly describes a scenario in his public speeches: humanity is standing on the eve of the "golden age of AI," where AI will become a significant force against inflation. In his narrative, the productivity leap brought about by AI will further reduce corporate costs, opening up ample room for the Federal Reserve to cut interest rates.

However, this "bet of the century" on AI productivity is far from reaching a consensus, with doubts spreading from academia to within the Federal Reserve, far more intense than the controversy Greenspan faced back then.

The root of the disagreement lies in the fact that many economists believe that anchoring monetary policy to uncertain technological dividends is tantamount to walking a tightrope.

In an article published in The New York Times, former Federal Reserve Chair and current Treasury Secretary Janet Yellen pointed out that Warsh only focused on the inflation-reducing potential of AI on the supply side, while ignoring its inflationary effect on the demand side. The large-scale investments by companies in data centers, power grids, and high-end equipment may actually become "inflation fuel" in the short term.

Beyond the logic of monetary policy, Warsh's ideas for reforming the Federal Reserve also reflect his admiration for the "constructive ambiguity" concept of the Greenspan era.

Warsh has repeatedly criticized the Federal Reserve for becoming "overly talkative" and overly politicized: frequent press conferences and intensive public statements have made the central bank's decision-making inflexible. Warsh advocates for a significant streamlining of the communication mechanism, eliminating the tradition of eight annual press conferences and abandoning the quarterly interest rate "dot plot," returning to a communication model that emphasizes substance over form. Similar to the Greenspan era, this would preserve the flexibility of monetary policy through vague language.

Even more radical is its balance sheet reduction plan. Warsh plans to forcibly shrink the $6.7 trillion balance sheet to $3 trillion, which means the Federal Reserve would need to abandon the current "full reserve" framework and return to the traditional "scarce reserve" management model. However, this move is extremely risky. If the balance sheet reduction is too rapid, it could easily repeat the liquidity collapse in the overnight lending market in 2019, triggering financial turmoil.

During the process of quantitative tightening, long-term interest rates often surge. The sharp rise in long-term interest rates was one of the main reasons for "Black Monday" in August 1987.

On May 19th, a fierce sell-off swept through the global bond market, causing a sharp rise in US Treasury yields. The 30-year Treasury yield broke through the 5% mark, reaching its highest level since 2007; the 10-year Treasury yield approached a high of 4.6%; and the 2-year Treasury yield rose to 4.1%, its highest level since February 2025. This collective surge in US Treasury yields reflects the market's aggressive risk pricing in Warsh's future policy path.

The most "obedient" Federal Reserve Chairman? Trustworthiness becomes the first test of his term.

Newly appointed Federal Reserve chairs typically face market tests or trials during their first six months in office, as exemplified by Greenspan's "Black Monday" stock market crash at the start of his term. As history moves into 2026, Warsh will similarly begin his term amidst a storm of public opinion regarding his "independence."

Simply put, Walsh's first test after taking office was not inflation or recession, but trust.

His nomination itself was rife with political maneuvering. Trump had repeatedly criticized Powell publicly, stating that he needed a "compliant" chairman; Democratic Senator Warren even went so far as to denounce Warsh as Trump's "mouthpiece" during the hearings.

Despite Warsh's repeated promises to uphold the Fed's policy independence and the White House's lack of pressure, market trust has long been fragile. To dispel accusations of him being a "White House puppet," Warsh will most likely adopt a hawkish approach at his first FOMC meeting (June 16-17), demonstrating his independence to the market with a strong stance.

The reality is far more complex than imagined. Powell's unusual decision to remain on the Federal Reserve Board until 2028 makes him a key figure in checking Warsh; at previous Fed meetings, three policymakers opposed rate cuts, and Warsh replaced Milan, the only radical advocate of rate cuts. With allies leaving and checks and balances still in place, Warsh has virtually no room for rate cuts in the short term.

Market expectations subsequently reversed. As of May 23, the latest CME FedWatch data showed that the probability of a Fed rate cut had dropped to 0%, and the market was instead betting on a rate hike as the next step. Some economists believe that if inflation continues to rise, the Fed may need to raise rates by about 100 basis points to reverse the three rate cuts scheduled for the second half of 2025.

A dilemma regarding "independence" versus "anti-inflation" looms before Walsh, making his debut a tough battle.

The start of the Warsh era also presents a difficult challenge for the Federal Reserve itself.

Greenspan's ideas were faintly visible in him; he firmly believed that technological revolution could break through the growth ceiling. He happened to be on the eve of the AI explosion, but also caught up with the persistently high levels of stagflation.

Greenspan's legendary career was inseparable from the gifts of his time, but Walsh's future remains uncertain. Whether he truly possesses the mastery of Greenspan will soon be revealed by the financial markets in the storm of his upcoming debut.

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