Kevan Warsh at the Helm of the Fed: A Capital Strategy Paving the Way for AI Productivity

Original author: Raoul Pal

Translation: AididiaoJP, Foresight News

The Senate today confirmed Kevin Warsh as the 17th Chair of the Federal Reserve by a vote of 54 to 45, the closest vote in the institution's history by both opposition and approval. The media interprets this as a political story: Trump finally got his way, Democrats fought back fiercely, Fetterman switched sides to vote in favor, and partisan divisions have now extended to the Fed.

That is just the surface; the real story is barely understood by anyone. To see it clearly, you must stop judging this vote with a left-right scorecard and ask a different question: Who chose Warsh, what did they buy when choosing him, and what does this mean for markets over the next two years?

Why Warsh Specifically?

I want to start from an unusual place because framework matters.

I have been developing a framework called the Universal Code for the past few years. Its first law is simple: The universe is organized to maximize intelligent output per unit of energy consumed. Life generates more intelligence than pure chemical reactions, civilization generates more than biology, and AI generates more than civilization built around human cognition. Because this is the gradient the universe selects for, capital follows it. Capital flows to whatever configuration produces the most intelligence per unit of energy at any given moment.

This is the first law of the Universal Code. It applies to biology, civilization, markets, and AI training runs. On the actual trajectory the world is currently on, the configuration winning this gradient is the semiconductor cycle accelerated by AI, layered with accelerated energy buildout, all compounding within an exponential phase. Capital is being pulled toward this configuration by a force that conventional macro models cannot explain because they lack this first law. So everything else follows; political alliances are restructuring around who can provide access to the underlying substrate. Geopolitical alliances are reshuffling around who controls chips, energy, and the dollar pipelines funding it all. This week's Beijing summit, Gulf region compute buildout, Western semiconductor reshoring, and the donor coalition reshaping Washington politics are not separate stories.

They are expressions of the same gradient at different scales. Nations and alliances aligned with the gradient compound; those opposing it decline.

If you accept this framework, then the most important variable in the macro environment over the next decade is whether monetary policy obstructs or aligns with this route. A Fed fighting AI buildout with restrictive rates will strangle the substrate transformation the global economy now depends on. A Fed aligning with it will let the productivity wave do its work.

Kevin Warsh is the candidate for Fed Chair with the deepest personal insight into this route. For most of the past decade, he was not a central banker but a director and tech investor. He served on boards; as a private investor, he allocated capital into the AI infrastructure stack. He observed from inside the rooms building this, not from FOMC briefing books. When he says he believes a productivity boom will lead America through the 21st century, he is not making an optimistic forecast. He is stating an investor conviction based on what he has seen and invested in firsthand.

This is what media coverage has missed. He is not a hawk switching camps because Trump promised a job. He is an investor who has been long the productivity miracle for years, now controlling the institution that determines whether that miracle compounds or gets strangled by tight money. The other main candidates Trump considered lacked this background: one was an academic economist, another a community banker. Kevin Warsh is the only one of the three who has actually deployed capital into the substrate of the next decade.

This makes him the First Law candidate. He is the operator whose stated beliefs and personal portfolio both point toward keeping the fastest channel for intelligence compounding open.

What Warsh Has Been Saying

Over the past twelve months, Warsh has laid out an unusually specific monetary policy agenda in public records. He explicitly called for what he termed a "regime change" at the Fed. He explicitly called for a new Treasury-Fed accord modeled on the 1951 Accord. He proposed reforming the inflation data the Fed uses. He proposed removing forward guidance from communications. He proposed encouraging more internal dissent on rate decisions. He proposed shrinking the Fed's balance sheet and coordinating this posture with Treasury debt management.

Read individually, these sound like the technical preferences of a thoughtful former Fed governor. Put together, they describe an operational model combining two different historical contexts. One is the financial repression playbook of 1946-1955; the other is the Greenspan productivity-led playbook of the late 1990s. The combination of both is exactly what is currently needed.

The Greenspan Playbook Is the Real Template

The 1951 framework is rhetorical cover; the Greenspan late-1990s playbook is the actual operational template.

Here is what Greenspan did from 1996-2000. The economy was running hot. Unemployment was below what conventional models called the natural rate. Headline CPI was sometimes elevated due to oil and food price swings. But the key data point was that core inflation, excluding food and energy, did not accelerate as the Phillips Curve predicted. Greenspan looked at productivity data and concluded something structural was happening.

The IT investment cycle was driving productivity growth, suppressing unit labor costs without requiring labor market slack. Even as headline CPI fluctuated, core CPI remained anchored. He concluded he could ignore noisy headline data because the underlying core was suppressed by productivity. Conventional dogma said to raise rates aggressively to ward off impending inflation. Greenspan refused. He kept rates low. He let asset prices run. He let the expansion compound for four more years than the conventional reaction function would have allowed. His coordination with Treasury Secretary Rubin and later Summers was known as the "Committee to Save the World."

The Fed and Treasury effectively ran a single strategy as one institution. Greenspan's eventual rate hikes in 1999-2000 are now widely understood as a policy error; productivity could have absorbed more inflation.

What Bessent and Trump want is the 2026-2030 version of this operation. AI is the equivalent of the IT cycle but at a much larger scale. AI capital expenditure is running at multiples of late-1990s tech capex. If the productivity wave is real, the Fed can run looser policy than conventional models suggest because productivity suppresses unit labor costs even when the economy is hot. Ease rates slightly, do not make dramatic moves. Let productivity absorb the slack. Let the economic transformation do the deflationary work that rate hikes would do anyway.

This is why Warsh is indispensable. He is the candidate who truly believes the productivity miracle is real because he has been investing in it. He has the institutional credibility from the 2006-2011 Global Financial Crisis tenure to hold the line when the media and traditional Fed network demand he hike rates in response to the latest CPI print. He has the rhetorical cover (the 1951 framework) to install coordination architecture without appearing captured. And he possesses the personal conviction to repeatedly "do nothing" in the face of inflation data that would force a less confident operator to react.

The Greenspan playbook only works if the operator running it truly believes the productivity miracle is real. That is the test. Powell's conviction is not deep enough. Warsh can read it from the data, but he would not have the investor conviction Warsh has. Warsh is the only available candidate who has personally bet on this.

Why Must This Happen?

US federal debt is approximately $36 trillion. Under the current maturity structure, roughly $9-10 trillion rolls over annually. The Fed has been raising rates while running quantitative tightening, meaning it shrinks its balance sheet while the Treasury issues record debt to fund deficits. The marginal buyer for long-term Treasuries must be the private sector, and a significant portion of that must be foreign buyers.

In a world where foreign buyers are structurally overweight dollars, this works. In our world, where China has been a net seller of Treasuries for several years, and Japan manages its currency weakness through holdings it cannot expand dramatically, the situation is different. Long-term yields drift upward. Term premium expands. The cost of refinancing debt rises faster than economic growth. It gets harder every year.

You can solve this in two ways. You can pursue fiscal austerity, which is politically impossible at the required scale. Or you can pursue financial repression. There is no third option that is honest with the numbers.

The architecture being built is the financial repression option, packaged in modern institutional language and combined with the Greenspan productivity bet to make it socially sustainable. The Treasury issues short-dated T-bills at the front end of the curve, where demand is structurally inelastic. Banks rebuild balance sheets under new regulatory frameworks to absorb duration at the back end. The Fed runs a posture that does not fight this architecture with aggressive rate hikes. Stablecoin issuers absorb hundreds of billions in T-bills as part of their reserve composition. The dollar depreciates enough to attract the necessary foreign duration bids.

To achieve this, you need a Fed Chair who correctly understands the situation and does not fight it. It is no coincidence that Warsh has been publicly describing the exact policy posture this architecture requires for the past twelve months.

Bessent's International Operations

Another key operator in this architecture is Bessent at the Treasury. Most reporting frames Bessent as a domestic figure with a fiscal portfolio. This is wrong. Bessent's most important work is at the international level.

The architecture requires foreign buyers to absorb a meaningful share of long-term Treasury issuance for the rollover math to clear at acceptable real yields. Foreign buyers will step in only if three things are true. The dollar must be depreciating, not appreciating, or they take FX losses. They must have a strategic reason to hold Treasuries, not just yield, because yield alone is insufficient to offset FX risk. They need an institutional channel through which to recycle their dollar surpluses into US Treasuries.

Bessent is running all three simultaneously. Yesterday's Beijing summit is the most visible piece. The architecture of the negotiations with China is not primarily a trade deal. It is a management framework where China gets explicit access to the US substrate (chips, capital equipment, AI infrastructure) under specific licensing arrangements, in exchange for not selling its dollar reserves, continuing to recycle trade surpluses into Treasuries through intermediary chains, and accepting substrate access tariffs (the Nvidia 25% fee model is a proven example). This is not a free trade arrangement. It is an industrial deal of the financial repression era, packaged in trade language.

Parallel patterns are running with Japan and South Korea (the cleanest channels for North Asian surplus recycling into US Treasuries). With the UAE (being built as a new intermediary pole expanded via Fed swap lines). With Hong Kong (preserved for continuity as the traditional conduit to China). With Singapore (as the remaining cross-Asia clearing center). The architecture is multi-polar by design, not bilateral. Bilateral arrangements have a single point of failure; multi-polar arrangements have redundancy. Bessent is wiring redundant foreign duration bids into the rollover architecture.

This is where Warsh and Bessent coordinate, and why the Treasury-Fed accord Warsh constantly invokes matters substantively. Bessent secures foreign duration bids through bilateral agreements and FX management. Warsh ensures Fed policy does not break those bids by being too restrictive. If the Fed runs tight monetary policy, US real yields rise, foreign holders bear heavier currency losses, making foreign duration bids harder to clear. If the Fed runs loose monetary policy, US real yields fall, the dollar depreciates, and foreign buyers can absorb Treasury issuance on acceptable terms. The accord is the institutional document that allows the Fed to run the second posture rather than the first.

The "Committee to Save the World" was run by Greenspan and Rubin twenty-five years ago for this coordination: the LTCM rescue, the Asian crisis response, and the late-1990s productivity boom all sat within the same coordination framework. Warsh and Bessent are the 2026 edition of the Committee. The difference is that the 2026 edition faces an international financial architecture far more contested than anything Greenspan and Rubin ever confronted.

The Donor Coalition

Below the visible political layer sits the decisive principal coalition that has been forming since 2024. Crypto founders, AI infrastructure operators, energy capital allocators. These are the people funding the political operation that delivers this architecture. They are not buying ideology. They are buying execution. They want stablecoin regulatory clarity, AI capex policy stability, energy permitting acceleration, and a monetary policy environment that does not strangle AI buildout with restrictive rates.

The Trump administration is the operator. Bessent at Treasury is the architect of the international leg. Warsh at the Fed is the institutional anchor domestically. The Republican Senate majority is the formal delivery mechanism. The donor coalition is the deeper substrate underlying all of this.

When you read Warsh's ascension through this framework, it no longer looks like a partisan fight. It begins to look like a contract being executed. The donor coalition wanted the Fed Chair seat; they got the Fed Chair seat. The vote tally is the formal delivery document.

What This Means for Markets

If you accept this framework, several things follow.

Warsh's first FOMC meeting is June 16-17. He cannot cut rates with headline CPI above 4% and energy prices elevated without destroying his credibility immediately. So the meeting will not deliver a cut. It will deliver signaling, and the signaling will be more specific than the media expects. Warsh will begin shifting the institutional focus from headline CPI to core, describing the energy price spike driven by the US-Iran war as transitory. He will signal that there is more room around the 2% target than markets currently price, treating it as a long-term average rather than a hard monthly constraint for every single data print. He will soften forward guidance, using a more discretionary reaction-function tone. He will almost certainly launch a formal monetary policy framework review targeting completion in 2027. None of these are cuts, but all of them are the institutional reconstruction needed for cuts to come later without being interpreted by the bond market as a political concession.

By end of 2026, the framework review will be public. By mid-2027, a visible Treasury-Fed accord will be announced or formally negotiated. By end of 2027, the federal funds rate will be 250 to 325 basis points below current levels. The Fed will be conspicuously ignoring service inflation indicators in the 3-4% range while nominal GDP runs at 5-6%. Gold continues to rise because financial repression is precisely the moment gold prices for. The dollar depreciates enough to clear foreign duration bids. Crypto compounds because substrate transformation runs independently of monetary policy, and the institutional guarantee for this architecture just became more solid in the Fed Chair seat. AI capex names compound because the cost of capital is no longer a tail risk.

There is one variable that breaks the entire setup. It is not Warsh's policy preference. It is the bond market itself.

If long-term Treasury yields stay above 5.5%, or the term premium stays above 1.5%, or the 10-year real yield stays above 2.75%, then regardless of what Warsh does at the Fed, the architecture will break from the outside in. The bond market is the binding constraint. Warsh's appointment removes one institutional risk but does not remove that one.

This is why the next six months are so important. They are the period where the bond market either gives the new Fed Chair room to install the architecture or does not. If it gives room, the cycle extends to at least 2027, potentially into 2028. Risk assets compound. Crypto and AI capex names are the biggest beneficiaries. If the bond market revolts in the next six months due to hot inflation data, the architecture risks failing before it can operationally exist.

What to Remember

First, Warsh is not what the news suggests. He is not Trump's puppet. He is the structurally correct operator for what they are actually trying to do: run the Greenspan late-1990s playbook atop a 1946-1955 financial repression architecture, substituting AI for the IT cycle as the productivity engine. His tech investor background is the key qualification, not his 2006-2011 Fed governorship. He has been long this miracle for years.

Second, Bessent's international architecture is the other half of the operation. The Treasury-Fed accord Warsh constantly invokes is the institutional document. The actual substance is Bessent securing foreign duration bids through bilateral agreements with China, Japan, South Korea, the Gulf, and a broader multi-polar intermediary network, while Warsh runs Fed policy consistent with Treasury financing needs. Neither operator works without the other. This week's China agreement and today's Warsh confirmation are two pieces of the same architecture, not two separate stories.

Third, the real test is not Warsh's first FOMC meeting. It is the bond market's behavior over the next two quarters. Watch the 10-year yield, the term premium, and real yields. These are the variables that determine whether the architecture executes or breaks.

The market is still pricing a conventional inflation fight. This framework treats the conventional fight as structurally unlikely because the productivity wave does the deflationary work the Fed cannot achieve, and foreign duration bids clear the rollover the bond market cannot clear alone.

The gap between these two pricings is the asymmetry. This asymmetry is where the returns for the next two years reside.