The Fed's "successor" has reversed course: from a "loyal dove" to a "reformist"—has the market script changed?

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

Just when Wall Street was almost certain that Kevin Hassett would become the new chairman of the Federal Reserve, a recent meeting between Trump and former Federal Reserve Governor Kevin Warsh at the White House last week has reignited the suspense in this bet.

Unlike previous perfunctory meetings, this one saw a subtle but significant shift in Trump's attitude towards Warsh. He clearly gave Warsh more credit, even stating in an interview with the Wall Street Journal: "I think both Kevins are great." Warsh has now joined Hassett as a leading candidate for Federal Reserve Chairman.

The "Double Kevin Controversy" between Hassett and Warsh not only signifies a personnel shift from "loyal doves" to "Federal Reserve reformists," but is essentially a game about the logic of dollar liquidity over the next four years (further reading: " A Look Ahead to the New Fed Leader: Hassett, Coinbase Holdings, and Trump's 'Loyal Doves' ").

It could be said that Trump's statement "Everything is great" represents "enormous uncertainty" for the market.

I. From Hassett's "One-Man Show" to Walsh's "Two Kevins" Controversy

The capital market is always the most honest. On the prediction market Polymarket, astute funds have already taken the lead in repricing this "battle for the throne".

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

It's worth noting that just two weeks ago, in early December, Hassett was leading the pack with an overwhelming advantage of over 80%, while Walsh, like other "runners-up," had a winning percentage in the single digits ( Update: As of December 17, Hassett has overtaken Walsh again, becoming the leader once more with 53% to 27% ).

So what exactly happened that caused the previously clear situation to reverse in an instant? After reviewing the publicly available information, Walsh's sudden rise to power and Hassett's "fall from favor" most likely stemmed from the details of their "advancement and retreat."

First, Walsh's ability to rise to prominence was primarily due to his "hardcore network of relationships" that connected him directly to Trump's inner circle.

In fact, compared to Hassett's role as an "aide-de-camp," Walsh's personal relationship with Trump was much closer, thanks to Walsh's father-in-law, billionaire Ronald Lauder, the heir to Estée Lauder. He was not only Trump's financial backer but also Trump's college classmate and close friend for many years.

With this relationship in mind, Warsh not only advised the transition team but was also naturally regarded as "one of his own" by Trump. At the same time, Warsh was also a long-time friend of another of Trump's key figures, the current Treasury Secretary Bessant, and as mentioned in previous articles, Trump once favored Bessant to become the next Federal Reserve Chairman.

Beyond personal relationships, Warsh also gained endorsement from the "professional circle." According to the FT, citing sources familiar with the matter, JPMorgan Chase CEO Jamie Dimon explicitly expressed his support for Warsh at a recent closed-door summit of asset management giants, and bluntly pointed out that Hassett might push for aggressive interest rate cuts to please Trump, thereby triggering an inflationary backlash.

This also reflects, to some extent, the prevailing sentiment among Wall Street's elite, and the collective support from this circle undoubtedly increases Warsh's leverage. This trust was validated during Trump's meeting with Warsh last week—Trump revealed that Warsh was his top choice and pointed out that Warsh was "broadly aligned" with him on monetary policy, even going so far as to suggest that the next chairman would consult him when setting interest rate policy, but would not need to completely follow his advice.

In contrast, Hassett, who was initially firmly in control, seems to have made a tactical mistake: he prematurely attempted to demonstrate his "independence" to the market before even receiving a formal nomination.

In several public statements last week, Hassett deliberately distanced himself from Trump in response to concerns from the bond market that he lacked backbone. For example, when asked how much weight Trump's opinions carried in the Fed's decisions, he replied, " No, his opinions have no weight... They are only relevant when they are reasonable and supported by data ." He even added, " If the inflation rate rises from 2.5% to 4%, then we can't cut interest rates ."

Objectively speaking, this textbook-style "central bank governor's speech" may appease bond traders, but it is very likely to anger Trump, who is extremely eager for control. Interestingly, it was after these remarks were published that Trump's meeting with Warsh began to be reported in the media.

After all, what Trump needs now is an "obedient" partner, not another "preachy" Powell. For the sake of controlling and planning future monetary policy, regardless of Hassett's original intentions, this eagerness to distance himself from the issue has likely been recorded as a serious "minus" in Trump's mind.

II. Warsh: An "insider" who once came one step away from the "Federal Reserve throne"

In fact, Walsh was by no means an unexpected surprise. During Trump's first term, he was the one who "almost got everything, but ultimately missed out."

Few people remember that Powell, whom Trump now criticizes daily, was the Federal Reserve Chairman personally appointed by Trump in 2017.

What is less known is that the final showdown took place between Powell and Warsh. At that time, Warsh was the youngest governor in the history of the Federal Reserve (at the age of 35) and a key assistant to Bernanke during the 2008 financial crisis. However, he unfortunately lost in the end to Powell, who was strongly lobbied by then Treasury Secretary Mnuchin.

Interestingly, four years later, Trump seems to be correcting his "mistakes" from back then. At the end of last year, the Wall Street Journal, citing sources familiar with the matter, revealed that Trump had considered appointing Walsh as Treasury Secretary after his re-election.

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

This is also thanks to Walsh's near-perfect resume, which includes a Stanford undergraduate degree, a Harvard Law School degree, a former Morgan Stanley executive, and a key economic advisor in the George W. Bush administration.

• During his college years, he majored in economics and statistics at Stanford University, and then went on to study law and economic regulatory policy at Harvard Law School. He also completed courses in capital markets at Harvard Business School and MIT Sloan School of Management. He is not only a professionally trained individual, but also a versatile talent with expertise in law, finance and regulation.
• After graduating from university, he spent many years working in the mergers and acquisitions department of Morgan Stanley, serving as a financial advisor to multiple companies in various industries, until he resigned from his position as vice president and executive director of Morgan Stanley in 2002.
• After joining the Bush administration, he served as Special Assistant to the President for Economic Policy and Executive Secretary of the National Economic Council, advising the President and senior government officials on issues related to the U.S. economy, particularly capital markets, banking, and insurance.

Adding to his background as a billionaire family mentioned above, it's no exaggeration to say that for the past two decades, from Morgan Stanley to the National Economic Council of the Bush administration, and then to the Federal Reserve Board of Governors, Warsh has been active in the circles of the world's top financiers.

Therefore, his dual attributes of understanding the rules of Wall Street and being a member of Trump's inner circle were key to his ability to reverse Hassett's fortunes at crucial moments.

III. Two "Kevins", Two Scripts

Although Hassett and Walsh both have the same name, Kevin, the scripts they prepared for the market are completely different.

If Warsh does indeed take office, we are highly unlikely to see a Hassett-style "rate cuts and massive quantitative easing" frenzy, but rather a high-level operation that precisely targets the Fed's QE policy and mission structure.

This stems from the fact that, over the past fifteen years, Warsh, as a leading advocate against QE, has been one of the Federal Reserve's most vocal critics—he has repeatedly and publicly attacked the Fed's abuse of its balance sheet, and even resigned in 2010 in protest against the second round of quantitative easing (QE2).

His logic is very clear and hardline: "If we were quieter on the printing press, our interest rates could actually be lower." This means that Warsh was trying to suppress inflation expectations by reducing the money supply (QT), thereby making room for lowering nominal interest rates. This is also a difficult operation of "trading space for time," which aims to completely end the "monetary dominance" era of the past fifteen years.

From the perspective of interest rate cuts, Warsh also published an article this year criticizing the Federal Reserve for causing a sharp rise in inflation, and stated that even if Trump's tariff policies are implemented, he would support another interest rate cut. Therefore, according to Deutsche Bank's projections, once Warsh takes office, the Federal Reserve may launch a unique combination of measures, namely, cooperating with Trump to cut interest rates on the one hand, and aggressively reducing the balance sheet (QT) on the other hand.

Furthermore, unlike Powell's attempts to fine-tune the economy, Warsh advocates that the Fed should "manage as little as possible." He believes that "forward guidance is almost useless in normal times" and condemns the Fed's "mission sprawl" on issues such as climate and inclusion. He argues that the Fed and the Treasury should each fulfill their respective responsibilities, with the Fed responsible for managing interest rates and the Treasury responsible for managing fiscal accounts.

Of course, despite such sharp criticism, Warsh is essentially a "reformer" rather than a "revolutionary." He advocates "restoration" for the future of the Federal Reserve, that is, retaining its core structure but eliminating the wrong policies of the past decade. Therefore, if he were to take the helm, the Federal Reserve would return to its most fundamental mission: to defend currency value and price stability, rather than letting monetary policy take on the responsibilities that should belong to fiscal policy.

Overall, a Federal Reserve led by Warsh would likely narrow its policy mandate and gradually normalize its balance sheet over time.

However, for Crypto and US tech stocks that are used to being "fed" by liquidity, Walsh's rise to power is indeed a huge challenge in the short term. After all, in his view, unlimited liquidity is not only poison, but also something that needs to be "destroyed".

But looking at the bigger picture, Walsh might be the real "ally"—thanks to his strong advocacy for free markets and deregulation, his extreme optimism about the US economic outlook, his belief that AI and deregulation will bring about a productivity explosion similar to that of the 1980s, and his status as one of the very few executives who have actually invested real money in Crypto (formerly the stable project Basis and the crypto index fund management company Bitwise), making him a "knowledgeable" person.

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

Of course, Warsh and Trump are not entirely on the same page, and the biggest potential problem lies in trade policy. Warsh is a staunch supporter of free trade and has publicly criticized Trump's tariff plans as potentially leading to "economic isolationism." Although he recently stated that he would support interest rate cuts even if tariffs were increased, this thorn remains.

How to walk the tightrope between "maintaining the credibility of the US dollar" and "cooperating with Trump's demands for tariffs/interest rate cuts" will be his biggest challenge in the future.

In conclusion: There is only one director.

In short, the essence of this "two Kevins battle" is the choice between two market paths.

Choosing Hassett is a liquidity frenzy, with the Federal Reserve, following the White House's lead, likely becoming the stock market's cheerleader. In the short term, the Nasdaq and Bitcoin may soar to the moon, but at the cost of long-term runaway inflation and further collapse of the dollar's credibility.

Choosing Walsh would likely lead to a surgical reform. In the short term, the market may experience withdrawal symptoms due to tightening liquidity, but long-term capital and Wall Street bankers would feel more at ease due to the support of "deregulation" and "stable currency".

But regardless of who ultimately wins, one fact will not change: in 2020, Trump could only criticize Powell on Twitter; but in 2025, Trump, returning with an overwhelming victory, will no longer be content to be merely a bystander.

Whether the actors on stage are Hassett or Walsh may determine the direction of the plot, but the overall director of this show has firmly become Trump.