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The FED and the Reset

The FED and the Reset
Source: here

The Unusual Appointment: Kevin Warsh

Kevin Warsh is described as an unconventional Federal Reserve chair with:

  • Net worth over $100 million
  • Stakes in crypto prediction markets, Ethereum developer tools, a digital human cloning platform, and a reversible male contraceptive startup
  • Training under Stanley Druckenmiller ("one of the greatest macro traders who ever lived")
  • Public statement calling Bitcoin "the new gold for anyone under 40"

Significant Point: The Unprecedented Leadership Transition

Jerome Powell is refusing to leave the Federal Reserve despite the new chair's appointment—citing "unprecedented legal attacks." This is described as "the most unusual leadership transition any of us have ever seen in the most important financial institution in the world." The last similar occurrence was in 1948 when President Truman personally requested an outgoing chair extend his tenure.

The Inflation Context

  • April PCE (Personal Consumption Expenditures): 3.8% — highest since May 2023
  • Core PCE: 3.3% — nearly double the Fed's 2% target
  • Market expectations have completely reversed: from pricing in 50 basis points of rate cuts to now pricing in roughly 20 basis points of rate hikes

Warsh's Four-Piece "Regime Change" Plan

Reform Description Risk
1. Shrink the balance sheet aggressively Reduce from $6.7 trillion in bonds and mortgage-backed securities "Controlled demolition" — could crash stocks and raise long-term rates simultaneously
2. Eliminate forward guidance Scrap the "dot plot" and cut annual meetings from eight to four Markets may adjust "violently in both directions" rather than gradually
3. Change inflation measurement Switch from core PCE to "trimmed averages" Cynical interpretation: makes inflation look lower, providing political cover for rate cuts
4. "Earned independence" Independence must be earned by hitting targets, not treated as sacred Raises question: "Is this reform or is this a leash?"

Surprising Point: The Project 2025 Connection

Warsh has appointed two interim advisers with ties to Project 2025, a 900-page conservative policy blueprint by the Heritage Foundation:

  1. Paul Winfrey — former Trump White House official who "literally wrote the Federal Reserve chapter in Project 2025"
  2. Daniel Hile — policy fellow at Stanford's Hoover Institution with "deep ties to the same movement"

Project 2025's Fed Restructuring Agenda

The transcript lists four specific proposals from Project 2025's Federal Reserve chapter:

  1. Kill the employment mandate — Strip the Fed's dual mandate to "inflation only"; rising unemployment would no longer trigger rate cuts
  2. Rules over discretion — Fixed formula replaces committee judgment; removes the "Fed put" (market rescue mechanism)
  3. Commodity or gold anchor — Tie dollar policy to a hard asset, making money printing "structurally impossible"
  4. Slim the staff — Cut hundreds of independent PhD economists who "model, challenge, and push back on policy"

The speaker's assessment: "You don't just get a smaller Fed, you get a more controllable one."

Significant Pointer to Wrong-Doing: The Contradiction Nobody's Pricing In

The transcript highlights a direct collision between Warsh's reform agenda and Trump's demands:

  • Trump wants lower interest rates — "more than anything else"
  • Warsh likely got the job by agreeing to be a "yes-man" to this
  • However, a "truly rules-based inflation-only Fed" would look at current data (3.8% inflation, elevated oil prices, bond market distrust) and hold rates or hike them, not cut them

Three scenarios presented:

  1. Reform is genuine → Trump doesn't get rate cuts → markets reprice hard
  2. Rules bend when inconvenient → "the whole independence narrative is really just a bunch of theatre"
  3. Warsh cuts rates anyway by changing the inflation measure — described as "the most politically elegant solution and the most financially dangerous one"

Historical Pattern Flagged

Every new Fed chair in the modern era has coincided with a significant market drawdown:

  • 2014 (Yellen)
  • 2018 (Powell)
  • 2020 (Powell reappointed)

The first Warsh Fed meeting is scheduled for June 17th.

The Bull Case: AI Optimism

Warsh is described as "a Silicon Valley-connected crypto-where-AI-optimistic thinker" who believes:

  • "AI is going to make everything cost less"
  • "We're at the front end of a productivity boom"
  • "Economic growth won't be inflationary"
  • "We're in the early innings of a structural decline in prices"

If correct, this could enable "strong GDP growth, falling prices, and room to cut rates simultaneously" — the 1990s playbook.

Speaker's Conclusion

The speaker describes Warsh as "the most interesting Fed chair in modern history" but flags multiple risks:

  • Short-term data is "not cooperating" (3.8% inflation)
  • Bond market doesn't trust Warsh yet
  • Project 2025 advisers suggest removing "safety nets the markets have relied on for 15 years"
  • Historical pattern of new Fed chair drawdowns
  • June 17th meeting is approximately 10 days away

Final warning: "Expect volatility."