Kev Warsh at the Helm of the Fed: A Capital Strategy to Pave the Way for AI Productivity

Original Author: Raoul Pal

Original Translation: AididiaoJP, Foresight News

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

This is only the surface. The real story is one that almost no one has grasped. To see it, you must stop judging this vote with a left-right scorecard and instead ask a different question: Who chose Warsh, what did they buy by choosing him, and what does it mean for markets over the next two years?

Why Warsh, Specifically?

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

Over the past few years, I have been developing a framework called the Universal Code. 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 intelligence than biology. AI generates more intelligence than civilizations built around human cognition. Because this is the gradient the universe selects for, capital follows it. Capital flows to whatever configuration can produce the most intelligence per unit of energy at any given moment.

This is the first law of the Universal Code. It applies to biology, civilizations, markets, and AI training runs. On the trajectory the world is currently on, the configuration winning this gradient is the AI-accelerated semiconductor cycle, layered with an accelerated energy build-out, all compounding within an exponential phase. Capital is being pulled toward this configuration by a force that conventional macroeconomic models cannot explain, because they lack this first law. Everything else follows. Political alliances are reorganizing around who can provide access to the underlying substrate. Geopolitical alliances are reshaping around who controls the chips, the energy, and the dollar pipeline that funds it all. This week's Beijing summit, the compute build-out in the Gulf, semiconductor reshoring in the West, and the donor coalition reshaping Washington politics – these are not independent stories.

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

If you accept this framework, then the most important variable in the macro environment for the next decade is whether monetary policy hinders or aligns with this route. A Fed fighting the AI build-out with restrictive rates would strangle the substrate transition the global economy now depends on. A Fed that aligns with it would 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 board member and a tech investor. As a private investor, he allocated capital into the AI infrastructure stack. He observed from inside the rooms where this build-out was happening, not from FOMC briefing books. When he says he believes a productivity boom will lead America to win the 21st century, it is not an optimistic forecast. It is a statement of conviction from an investor based on what he has seen and where he has personally invested.

This is the part the media coverage has missed. He is not a hawk who switched camps for a promised job from Trump. He is an investor who has been long the productivity miracle for years, now controlling the institution that will decide whether that miracle compounds or gets choked off by tight money. The other major candidates Trump considered lacked this background. One was an academic economist, the other 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 terms 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 that stance with Treasury debt management.

Read individually, these sound like the technical preferences of a thoughtful former Fed governor. Taken together, they describe an operating model that combines two distinct historical precedents. One is the financial repression strategy of 1946-1955. The other is the Greenspan productivity-led strategy 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 playbook from the late 1990s 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 volatility. But the crucial data point was that core inflation, excluding food and energy, did not accelerate as the Phillips Curve predicted. Greenspan looked at the productivity data and concluded something structural was happening.

The IT investment cycle was driving productivity growth, suppressing unit labor costs without needing labor market slack. Even with headline CPI volatility, core CPI remained anchored. He concluded he could ignore the noisy headline data because the underlying core was being suppressed by productivity. Conventional dogma said raise rates aggressively to prevent incoming inflation. Greenspan refused. He kept rates low. He let asset prices run. He let the expansion compound for four more years than a standard reaction function would have allowed. His coordinating relationship with then-Treasury Secretary Rubin and later Summers was called the "Committee to Save the World."

The Fed and Treasury effectively operated a strategy as one institution. Greenspan's eventual rate hikes in 1999-2000 are now widely understood as a policy mistake; 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 on a vastly larger scale. AI CapEx 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, even with the economy running hot, productivity will suppress unit labor costs. Cut rates a bit. Don't be dramatic. Let productivity absorb the slack. Let the economic transition do the deflationary work that rate hikes would fail to do anyway.

This is why Warsh is indispensable. He is the candidate who genuinely 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 media and traditional Fed network demand he hike in response to the latest CPI print. He has the rhetorical cover (the 1951 framework) to install the coordination architecture without appearing captured. And he has the personal conviction to repeatedly "do nothing" in the face of inflation data that would force a less committed 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 might read it from the data, but he won't have Warsh's investor conviction. Warsh is the only available candidate who has personally bet on this.

Why Does This Have to Happen?

U.S. federal debt is roughly $36 trillion. At the current maturity structure, about $9-10 trillion rolls over annually. The Fed has been hiking rates while running Quantitative Tightening (QT), meaning it is shrinking its own balance sheet while the Treasury issues record debt to fund deficits. The marginal buyer for long-term Treasuries must be the private sector, a large portion of which are foreign buyers.

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

You can solve this problem in two ways. You can do fiscal austerity, which is politically impossible on the required scale. Or you can do 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, where demand is structurally inelastic. Banks rebuild their 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 buying.

To achieve this, you need a Fed Chair who understands the situation correctly and does not oppose it. It is not coincidental that Warsh has been publicly describing the precise policy stance 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 so the rollover math clears at acceptable real yields. Foreign buyers will only step in if three things are true. The dollar must be depreciating, not appreciating, otherwise 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 to recycle their dollar surpluses back into U.S. Treasuries.

Bessent is running all three simultaneously. The Beijing summit yesterday is the most visible piece. The architecture being negotiated with China is primarily not a trade deal. It is a management framework where China gets explicit access to the American 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 a financial repression-era industrial agreement wrapped in trade language.

Parallel models are running with Japan and South Korea (the cleanest channels for recycling North Asian surpluses into U.S. Treasuries). With the UAE (being built as a new intermediary pole extended via Fed swap lines). With Hong Kong (the traditional conduit to China, preserved for continuity). With Singapore (the residual cross-Asia clearing hub). The architecture is intentionally multipolar, not bilateral. Bilateral arrangements have a single point of failure. Multipolar arrangements have redundancy. Bessent is engineering redundant foreign duration buyers into the rollover architecture.

Here is where Warsh and Bessent coordinate, and why the Treasury-Fed Accord that Warsh keeps invoking matters substantively. Bessent secures foreign duration buying through bilateral deals and FX management. Warsh ensures Fed policy does not break that buying by being too restrictive. If the Fed runs tight monetary policy, U.S. real yields rise, foreign holders take heavier currency losses, and it becomes harder to clear foreign duration buying. If the Fed runs loose monetary policy, U.S. real yields fall, the dollar depreciates, and foreign buyers can absorb the Treasury issuance on acceptable terms. The Accord is the institutional document allowing the Fed to run the second posture rather than the first.

The "Committee to Save the World" ran this kind of coordination 25 years ago under Greenspan and Rubin. The LTCM rescue, the Asian crisis response, and the late-1990s productivity boom all sat within the same coordinating framework. Warsh and Bessent are the 2026 version of the Committee. The difference is that the 2026 version faces a significantly more contested international financial architecture than anything Greenspan and Rubin ever dealt with.

The Donor Coalition

Below the visible political layer is the scale-determining principal coalition that has been assembled since 2024. Crypto founders, AI infrastructure operators, energy capital allocators. These are the people funding the political operation to deliver 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 the AI build-out 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 beneath it all.

When you read the Warsh confirmation through this framework, it stops looking like a partisan fight and starts looking like a contract being executed. The donor coalition wanted the Fed Chair seat. They got the Fed Chair seat. The vote was 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 high without immediately destroying his own credibility. So the meeting will not deliver a rate cut. What it will deliver is a signal, and that signal will be more specific than the media expects. Warsh will begin shifting the institution's focus from headline CPI to core, describing the Iran-war-driven energy price spike as transitory. He will signal more flexibility around the 2% target than markets currently price, treating it as a long-term average rather than a hard monthly ceiling every print must obey. 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 by 2027. None of these are rate cuts. But all are the institutional reconfigurations that allow rate cuts to come later without being interpreted by the bond market as political capitulation.

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 lower than current levels. The Fed will be conspicuously ignoring services inflation readings 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 in. The dollar depreciates enough to clear foreign duration buying. Crypto compounds because the substrate transition operates independently of monetary policy, and the institutional guarantee for that architecture just got 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 the long-term Treasury yield stays persistently above 5.5%, or the term premium stays persistently above 1.5%, or the 10-year real yield stays persistently above 2.75%, then regardless of what Warsh does at the Fed, the architecture breaks from the outside in. The bond market is the binding constraint. Warsh's confirmation removes one institutional risk. It 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 space to install the architecture, or it doesn't. If it does, the cycle extends at least into 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 even exist operationally.

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, with AI replacing the IT cycle as the productivity engine. His tech investor background is the key qualification, not his 2006-2011 Fed governor record. 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 keeps invoking is the institutional document. The actual substance is Bessent securing foreign duration buying through bilateral deals with China, Japan, South Korea, the Gulf, and a broader multipolar intermediary network, while Warsh runs Fed policy aligned with Treasury funding needs. Neither operator works without the other. This week's China deal 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 the real yield. These are the variables that determine whether the architecture executes or breaks.

Markets are still pricing for a conventional inflation fight. This framework sees that conventional fight as structurally unlikely because the productivity wave will do the deflationary work the Fed cannot achieve, and foreign duration buying will clear the rollover the bond market cannot clear alone.

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