During the hours-long hearing, Warsh — Trump’s chosen candidate — faced sharp questioning from both Republican and Democratic senators. His answer was unequivocal: “Absolutely not.” However, beyond his stance on independence, what truly moved markets was his sweeping critique of the Fed’s current policy framework and his proposal for a dual-track strategy of balance sheet reduction alongside potential rate cuts.

With current Fed Chair Jerome Powell’s term ending on May 15, the hearing is not just about one appointment — it directly shapes global expectations for U.S. monetary policy in the coming years.

Warsh’s Emphasis on “Independence”

When asked directly by Senator John Kennedy whether he would act as Trump’s “human puppet,” Warsh firmly rejected the notion.

“The President has never asked me to pre-commit to any interest rate decisions — and I would never agree to such a request,” he stated.

Responding to Trump’s public comment that he would be “disappointed” if rates were not cut immediately under Warsh’s leadership, Warsh replied that presidents often favor lower rates, and Trump simply expressed that openly. He stressed that it is normal in a democratic system for elected officials to voice opinions on interest rates, but this does not constitute a real threat to central bank independence.

Warsh also made a key point: Fed independence must be earned through performance, not assumed.

“Low inflation is the Fed’s shield,” he said. “When inflation surges, citizens are harmed and begin to question the value of central bank independence.”

He further emphasized that the Fed must “stay in its lane” and avoid becoming a general-purpose agency of government. Expanding into fiscal or social policy areas beyond its mandate would put its independence at risk.

“Independence” was the central theme of the hearing and the issue Warsh repeatedly returned to.

Warsh’s Reform Agenda for the Fed

Warsh described the inflation surge of 2021–2022 as a “policy mistake”, calling it a lasting challenge for the U.S. economy.

He argued that once inflation becomes entrenched, bringing it down becomes far more costly and difficult. As a result, he called for a “regime change” — a complete overhaul of the Fed’s inflation framework.

A key component of this shift would involve changes to communication and decision-making. Warsh criticized the current reliance on forward guidance, arguing that revealing policy paths too early reduces flexibility when economic conditions change. He proposed reducing the frequency of Fed officials’ public remarks, stating that “seeking truth is more important than repetition.”

Although he had previously highlighted AI-driven productivity gains as a potential reason for rate cuts, Warsh adopted a more cautious tone during the hearing when challenged on whether the AI narrative was overstated.

He also emphasized the need to shrink the Fed’s balance sheet in coordination with the Treasury. According to Warsh, a smaller balance sheet could lead to lower interest rates, better inflation outcomes, and stronger economic growth.

He criticized the current large balance sheet as having become a routine policy tool, arguing that it increases the Fed’s exposure to political pressures. He opposed the normalization of quantitative easing and instead advocated a gradual, deliberate reduction of the balance sheet.

The Fed’s balance sheet currently stands at approximately $6.7 trillion, with projections suggesting it could reach $10 trillion by 2035. Warsh made it clear he does not support this trajectory.

Signals of a Rate-Cut Bias

Although Warsh did not make explicit commitments on interest rates, his remarks suggested a leaning toward eventual rate cuts — but only in conjunction with balance sheet reduction.

On inflation, Warsh argued that tariffs are not the primary driver of persistent inflation. While tariffs may affect specific sectors, they cannot explain broad, sustained price increases across the economy. He pointed instead to domestic factors such as strong demand, a tight labor market, and delayed effects of fiscal stimulus.

This stance helps weaken the market narrative that tariffs would necessarily lead to more hawkish policy, providing moderate support for risk assets.

Market Reaction

Warsh’s testimony triggered immediate market volatility.

U.S. equities initially rallied but later pulled back, with the Nasdaq reversing intraday gains. Gold declined sharply, with spot gold falling nearly 1.7% and silver dropping more than 3%.

Analysts noted that Warsh’s comments on rebuilding the inflation framework suggest he may not yield easily to political pressure for preemptive rate cuts, prompting a reassessment of asset valuations.

Following the hearing, the probability of Warsh’s confirmation rose by roughly 15%. However, significant uncertainty remains.

Republican Senator Thom Tillis reiterated that he would not support Warsh’s nomination until ongoing investigations into cost overruns related to the Fed’s building renovation under Powell are resolved. Given Republicans hold only a narrow majority on the Senate Banking Committee, this opposition could delay or block the confirmation process.

Powell’s term ends on May 15, and he has indicated he will serve as interim chair until a successor is confirmed. This means that despite the high-profile hearing, whether Warsh will be confirmed in time remains uncertain.