The Federal Reserve's "successor" reversal: from "loyal dove" to "reformer," has the market script changed?

Written by: Frank, MSX Research Institute

After meeting the last person, Trump's thoughts changed once again.

Just as Wall Street was almost certain that the new Fed chair would be Kevin Hassett, last week, Trump's latest meeting with former Fed governor Kevin Warsh at the White House added suspense to this bet.

Unlike previous formalities, after this meeting, Trump's attitude towards Warsh underwent a subtle yet significant shift, clearly giving Warsh more recognition. In an interview with The Wall Street Journal, he stated: "I think both Kevins are great," placing Warsh alongside Hassett as a leading candidate for the Fed chair position.

The shift from Hassett to Warsh in the "Kevin showdown" not only signifies a personnel change from "loyal dove" to "Fed reformist," but is essentially a game about the logic of dollar liquidity over the next four years (see also: "Outlook for the New Fed Chair: Hassett, Coinbase Holdings, and Trump's 'Loyal Dove'").

It can be said that Trump's remark of "both are great" translates to "huge uncertainty" for the market.

1. From Hassett's 'One-Man Show' to Warsh's 'Kevin Showdown'

The capital market is always the most honest. On the prediction market Polymarket, keen investors have already completed a repricing of this "succession drama."

As of December 16, when this article was written, in the pool for "Who will Trump nominate as Fed Chair?" Warsh's odds have surpassed 45%, officially overtaking Hassett (42%) to become the new top "seed."

It is worth noting that just two weeks ago, at the beginning of December, Hassett had an overwhelming advantage of over 80%, while Warsh, like other "also-rans," had odds in the single digits (Update: As of December 17, Hassett has once again overtaken Warsh, leading with 53% to 27%).

So what exactly happened that caused the originally clear situation to reverse so suddenly? After sorting through public information, Warsh's sudden rise and Hassett's "loss of favor" likely stem from the details of their "one in, one out" dynamics.

First, Warsh's rise can be attributed to his "hardcore network" that connects directly to Trump's inner circle.

In fact, compared to Hassett's "staff" identity, Warsh has a closer personal relationship with Trump, thanks to Warsh's father-in-law—billionaire and Estée Lauder heir Ronald Lauder, who is not only a financial backer of Trump but also a longtime college classmate and close friend.

With this relationship backing him, Warsh not only provided advice to the transition team but was naturally viewed by Trump as "one of his own." At the same time, Warsh is also an old friend of Trump's other aide, current Treasury Secretary Mnuchin, who was previously mentioned as a potential candidate for the next Fed chair.

In addition to personal connections, Warsh has also gained endorsements from the "professional circle." According to FT citing informed sources, JPMorgan CEO Jamie Dimon recently expressed clear support for Warsh at a closed-door summit of asset management giants, bluntly pointing out that Hassett might implement aggressive rate cuts to please Trump, which could lead to inflation backlash.

This also somewhat represents the choice of the Wall Street elite, and the collective support from this circle undoubtedly increases Warsh's leverage. In last week's meeting between Trump and Warsh, this sense of trust was validated—Trump revealed that Warsh is his top choice and noted that Warsh's views on monetary policy are "generally aligned" with his own, even stating that the next chair should consult him on interest rate policy, though not necessarily follow his advice completely.

In contrast, Hassett, who was originally in a stable position, seems to have made a tactical error: attempting too early to demonstrate his "independence" to the market before officially receiving the nomination.

In several public statements last week, in response to the bond market's concerns about his "lack of backbone," Hassett deliberately distanced himself from Trump. For instance, when asked how much weight Trump's opinions carry in Fed decisions, he responded, "No, his opinions will carry no weight… only when his views are reasonable and supported by data do they have reference significance," and even added, "If inflation rises from 2.5% to 4%, then we cannot cut rates."

Objectively speaking, this textbook-style "central bank governor speech" might soothe bond traders, but it likely angered the power-hungry Trump. Interestingly, it was after these remarks were made public that the meeting between Trump and Warsh began to appear in the news.

After all, what Trump needs now is a "compliant" partner, not another "preaching" Powell. Due to the need for control over future monetary policy, regardless of Hassett's original intentions, this eagerness to distance himself is likely to be remembered by Trump as a serious "negative point."

2. Warsh: The 'Insider' Who Was Once a Step Away from the 'Fed Throne'

In fact, Warsh is not a sudden contender; during Trump's first term, he was the one who "almost had it all but ultimately missed out."

Now, few remember that the Powell, whom Trump criticizes daily, was precisely the Fed chair appointed by Trump in 2017.

What is even less known is that the ultimate showdown back then was between Powell and Warsh, with Warsh holding the title of the youngest governor in Fed history (at age 35) and being a key aide to Bernanke during the 2008 financial crisis, only to lose out at the last moment to Powell, who was heavily lobbied by then-Treasury Secretary Mnuchin.

Interestingly, four years later, Trump seems to be correcting the "mistake" of that year—last year, The Wall Street Journal cited informed sources revealing that after being re-elected, Trump considered appointing Warsh as Treasury Secretary.

It can be said that Warsh has never left Trump's sight and has always been "in the emperor's heart."

This is also due to Warsh's almost perfect resume: "Stanford undergraduate, Harvard Law PhD, former Morgan Stanley executive, core economic advisor in the George W. Bush administration":

• During college, he majored in economics and statistics at Stanford University, then attended Harvard Law School to study law and economic regulatory policy, while also completing capital markets courses at Harvard Business School and MIT Sloan School of Management. He is not only formally trained but also a versatile talent across law, finance, and regulation.
• After leaving academia, he spent many years in Morgan Stanley's M&A department, serving as a financial advisor for multiple companies across various industries, until he resigned from his position as Vice President and Executive Director in 2002.
• After joining the George W. Bush administration, he served as a special assistant to the president for economic policy and executive secretary of the National Economic Council, providing advice to the president and senior government officials on issues related to the U.S. economy, specifically on capital markets, banking, and insurance.

Combined with the billionaire family background mentioned earlier, it is not an exaggeration to say that for the past twenty years, from Morgan Stanley to the National Economic Council of the George W. Bush administration, and then to the Fed governor, Warsh has been active in the circles of the world's top financiers.

Thus, understanding Wall Street's rules of the game and being a member of Trump's core social circle, this dual identity is key to his ability to reverse Hassett's position at a critical moment.

3. Two 'Kevins', Two Scripts

Although both Hassett and Warsh are named Kevin, they have prepared entirely different scripts for the market.

If Warsh really ascends, we are unlikely to see the Hassett-style "rate cut bonanza," but rather a high-level surgery precisely targeting the Fed's QE policies and mission structure.

This stems from the fact that for the past fifteen years, as a flagbearer against QE, Warsh has been one of the Fed's sharpest critics—he has publicly criticized the Fed's misuse of its balance sheet multiple times and even resigned in 2010 in strong opposition to the second round of quantitative easing (QE2).

His logic is very clear and firm: "If we are quieter on the money printing machine, our interest rates can actually be lower," which means Warsh attempts to suppress inflation expectations by reducing the money supply (QT), thereby creating space for lowering nominal interest rates. This is a high-difficulty operation of "exchanging space for time," aimed at completely ending the "monetary dominance" era of the past fifteen years.

From the perspective of rate cuts, Warsh has also published articles this year criticizing the Fed for allowing inflation to surge and stated that even if Trump's tariff policy is implemented, he would support another rate cut. Therefore, according to Deutsche Bank's projections, once Warsh takes over, the Fed may implement a unique combination of policies, coordinating rate cuts with Trump while aggressively reducing the balance sheet (QT).

Moreover, unlike Powell, who tries to fine-tune the economy, Warsh advocates for the Fed to "intervene as little as possible." He believes that "forward guidance has almost no effect in normal times" and condemns the Fed's "mission creep" into issues like climate and inclusivity, arguing that the Fed and the Treasury must each perform their respective roles, with the Fed managing interest rates and the Treasury managing fiscal accounts.

Of course, despite such sharp criticism, Warsh is essentially a "reformist" rather than a "revolutionary." He advocates for the "restoration" of the Fed's future, meaning preserving its core structure while eliminating the erroneous policies of the past decade. Therefore, if he takes the helm, the Fed will return to its most fundamental mission of defending currency value and price stability, rather than allowing monetary policy to bear responsibilities that should belong to fiscal policy.

Overall, a Fed led by Warsh may narrow its policy scope and gradually normalize its balance sheet over time.

However, for the Crypto and tech stocks accustomed to liquidity "feeding," Warsh's ascension is indeed a huge challenge in the short term, as he views unlimited liquidity not only as poison but also as something that needs to be "destroyed."

But looking at the long term, Warsh may actually be the true "ally"—thanks to his extreme admiration for free markets and deregulation, and his strong optimism about the U.S. economic outlook, believing that AI and deregulation will bring about a productivity explosion similar to the 1980s. He is also one of the few high-ranking officials who have invested real money in Crypto (in projects like Basis and crypto index fund manager Bitwise), making him a knowledgeable person in the field.

This undoubtedly lays the foundation for a healthy rise in financial assets after the "de-bubbling."

Of course, Warsh and Trump are not completely in sync, with the biggest risk lying in trade policy. Warsh is a staunch advocate of free trade and has publicly criticized Trump's tariff plans for potentially leading to "economic isolationism." Although he recently stated, "Even if tariffs are raised, I would support rate cuts," this thorn still exists.

How to walk the tightrope between "maintaining dollar credibility" and "coordinating Trump's tariff/rate cut demands" will be the biggest test he faces in the future.

In Conclusion: There is Only One Director

In short, the essence of this "Kevin showdown" is a choice between two market paths.

Choosing Hassett would lead to a liquidity party, with the Fed likely transforming into a cheerleader for the stock market under the White House's baton. In the short term, the Nasdaq and BTC might soar to the moon, but the cost would be long-term inflation out of control and further collapse of dollar credibility.

Choosing Warsh, on the other hand, would likely usher in a surgical-style reform, with the market potentially feeling withdrawal symptoms due to tightening liquidity in the short term. However, due to the support of "deregulation" and "prudent monetary policy," long-term capital and Wall Street bankers would feel more at ease.

But regardless of who ultimately wins, one fact will not change: in 2020, Trump could only criticize Powell on Twitter; by 2025, with an overwhelming victory upon his return, Trump will no longer be satisfied with merely being a bystander.

Whether the actor on stage is Hassett or Warsh may determine the direction of the plot, but the overall director has firmly become Trump.