President Trump's Fed Chair nominee Kevin Warsh has secured his spot on a promise of “regime change,” but his quest to shrink the Fed's $6.6 trillion balance sheet may clash with President Trump’s demands to lower the Federal Funds rate.

The “Warsh Pivot” Trade

Traders expect the Powell-led Fed to stay the course in spring, with a 90% chance of “No Change” at the March 18 meeting and a 75% chance of a hold in April.

At Warsh's presumptive first meeting, the probability of a 25 basis points rate cut surges to 60%. Polymarket puts 80% odds on the Fed cutting at least twice this year to hit 3.00% or lower by year-end.

While Warsh's agenda sounds appealing to bulls, experts warn his two main promises may be on a collision course.

As reported by Bloomberg, the nominee has “pledged to shrink the Fed’s balance sheet” as a priority.

Warsh argues that an AI-driven productivity boom will suppress inflation, allowing the Fed to cut rates even while tightening its belt.

However, Wall Street veterans see shrinking the balance sheet (Quantitative Tightening) as effectively removing liquidity and tightening financial conditions—the exact opposite of cutting interest rates.

Doing both at once would send mixed signals to the market, and a rapid reduction in Fed holdings could drain reserves from the banking system too quickly.

Bloomberg notes that “accomplishing this goal will be difficult and slow,” warning that moving too fast could trigger instability similar to the 2019 repo market crisis.

On the other hand, Warsh's thesis relies heavily on the idea that AI will naturally lower prices.

If that productivity boom takes longer to materialize, Warsh could find himself stimulating the economy—via rate cuts—into sticky inflation.

What Investors Need To Know

The first half of the year, under a lame-duck Powell, is priced for stasis.

But the second half, under Warsh, promises a radical experiment in monetary policy.

If Warsh attempts to force a balance-sheet reduction alongside rate cuts, volatility could return to the bond market, testing the new Chair’s theories in real time.

As TS Lombard economist Dario Perkins told Bloomberg, Warsh is now facing a “winner’s curse” by finally getting the power he sought.

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