Warsh at the Helm of the Fed: A Capital Play 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 narrowest margin of opposition and approval in the institution's history. The media has interpreted this as a political story: Trump finally got his way, Democrats put up a fierce fight, Fetterman crossed party lines to vote in favor, and partisan divides have now extended to the Fed.

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

Why Warsh, of all people?

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

For the past few years, I've 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 mere chemical reactions. Civilization generates more intelligence than biology. AI generates more intelligence than a 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.

That's the first law of the Universal Code. It applies to biology, civilizations, markets, and AI training runs. On the trajectory the world is actually on, the configuration that wins this gradient is the semiconductor cycle accelerated by AI, superimposed on an 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. Everything else follows. Political alliances are realigning around who can provide access to the underlying substrate. Geopolitical alliances are reshaping around who controls the chips, the energy, and the dollar plumbing that funds it all. The Beijing summit this week, the computing buildout in the Gulf, the onshoring of semiconductors in the West, 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 will compound. Those that fight it will decay.

If you accept this framework, then the most important variable in the macro environment for the next decade is whether monetary policy obstructs or accommodates this routing. A Fed fighting AI buildout with restrictive rates would strangle the substrate transition the global economy now depends on. A Fed that accommodates it would let the productivity wave do its work.

Kevin Warsh is the candidate for Fed Chair who has the deepest personal insight into this routing. For most of the past decade, he hasn't been a central banker. He's been a director and a tech investor. He served on boards. As a private investor, he allocated capital into the AI infrastructure stack. He observed from inside the rooms where this buildout is happening, not from FOMC briefing books. When he says he believes the productivity boom will lead America to win the 21st century, it's not an optimistic forecast. It's a statement of conviction from an investor who has seen it himself and invested in it himself.

This is the part the media coverage has missed. He is not a hawk who switched camps because Trump promised him a job. He is an investor who has been long the productivity miracle for years, and now controls the institution that will determine whether that miracle compounds or gets killed by tight money. The other major candidates Trump considered lacked this background. One was an academic economist. The other was 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 public convictions 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 the public record. He has explicitly called for what he terms a "regime change" at the Fed. He has explicitly called for a new Treasury-Fed accord modeled on the 1951 Accord. He has proposed reforming the inflation data the Fed uses. He has proposed removing forward guidance from communications. He has proposed encouraging more internal dissent on rate decisions. He has proposed shrinking the Fed's balance sheet and coordinating that posture with Treasury debt management.

Read individually, these sound like the technical preferences of a thoughtful former Fed governor. Read together, they describe an operating model that combines two distinct historical contexts. One is the financial repression playbook from 1946-1955. The other is the productivity-led Greenspan playbook from the late 1990s. The combination is exactly what's needed right now.

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's what Greenspan did from 1996 to 2000. The economy was running hot. Unemployment was below what conventional models called the natural rate. Headline CPI was elevated at times due to oil and food price fluctuations. But the critical data point was that core inflation, excluding food and energy, was not accelerating 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 as headline CPI fluctuated, 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 head off imminent inflation. Greenspan refused. He kept rates low. He let asset prices run. He let the expansion compound for four years longer than the conventional reaction function would have allowed. His coordinated relationship with Treasury Secretary Rubin, and later Summers, was known as the "Committee to Save the World."

The Fed and Treasury effectively operated as one institution executing a strategy. 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 on a much larger scale. AI capex is running at multiples of late-1990s tech capex. If the productivity wave is real, then the Fed can run looser policy than conventional models suggest. Even if the economy runs hot, productivity suppresses unit labor costs. Cut rates slightly. Don't do anything dramatic. Let productivity absorb the slack. Let the economic transition do the deflationary work that rate hikes couldn't 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 his 2006-2011 global financial crisis tenure to hold the line when the media and the traditional Fed network demand he hike rates on the latest CPI data point. 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 an operator with weaker beliefs to react.

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

Why This Had to Happen?

US federal debt is roughly $36 trillion. At the current maturity structure, about $9-10 trillion rolls over annually. The Fed was raising rates while running quantitative tightening, meaning it was shrinking its own balance sheet while the Treasury was issuing record debt to fund deficits. The marginal buyer of long-term Treasuries had to be the private sector, a large portion of which are foreign buyers.

In a world where foreign buyers were structurally overweight dollars, this worked. In our world, where China has been a net seller of Treasuries for several consecutive years, and Japan is managing its currency weakness through holdings that cannot be significantly expanded, 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 in two ways. You can implement fiscal austerity, which is politically impossible at the required scale. Or you can implement financial repression. There is no third option that honestly faces 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 T-bills at the front end of the curve, where demand is structurally inelastic. Banks rebuild their balance sheets under the new regulatory framework to absorb duration at the back end of the curve. The Fed runs a posture that doesn't fight this architecture with aggressive rate hikes. Stablecoin issuers absorb hundreds of billions of dollars of T-bills as part of their reserve composition. The dollar weakens enough to attract foreign duration buying.

To achieve this, you need a Fed Chair who correctly understands the situation and won't fight it. It's no coincidence that Warsh has been publicly describing the precise policy posture this architecture demands for the past twelve months.

Bessent's International Operations

The other key operator in this architecture is Bessent at the Treasury. Most reporting treats Bessent as a domestic figure dealing with the fiscal mix. This is wrong. Bessent's most important work is at the international level.

The architecture needs foreign buyers to absorb a meaningful share of long-term Treasury issuance so the rollover math clears at acceptable real yields. Foreign buyers only step in if three things are true. The dollar must be weakening, not strengthening, 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 through which to recycle their dollar surpluses into US Treasuries.

Bessent is running all three things simultaneously. Yesterday's Beijing summit was the most visible piece. The architecture of negotiations with China is not primarily a trade deal. It's 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 template). This is not a free trade arrangement. It is an industrial-era financial repression deal packaged in trade language.

Parallel modalities 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 through expanded Fed swap lines), with Hong Kong (kept as the traditional conduit to China for continuity), and with Singapore (as the remaining cross-Asia clearing house). The architecture is multipolar by design, not bilateral. Bilateral arrangements have a single point of failure. Multipolar arrangements have redundancy. Bessent is wiring redundant foreign duration buying into the rollover architecture.

This is where Warsh and Bessent coordinate, and why the Treasury-Fed accord Warsh keeps invoking matters substantively. Bessent secures foreign duration buying through bilateral agreements and FX management. Warsh ensures Fed policy doesn't break that buying by being too restrictive. If the Fed runs tight monetary policy, US real yields rise, foreign holders take larger FX losses, making foreign duration buying harder to clear. If the Fed runs loose monetary policy, US real yields fall, the dollar weakens, and foreign buyers can absorb Treasury issuance on acceptable terms. The Accord is the institutional document that lets the Fed run the second posture instead of the first.

The "Committee to Save the World" ran this exact coordination twenty-five years ago, run by Greenspan and Rubin. 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 version of the Committee. The difference is the 2026 version faces an international financial architecture that is far more contentious than anything Greenspan and Rubin ever faced.

The Donor Coalition

Beneath the visible political layer is a decisive principal-agent coalition that has been forming 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 doesn't kill 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 beneath it all.

When you read Warsh's 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 count 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 elevated without immediately destroying his own credibility. So the meeting will not deliver a rate cut. What it will deliver is signaling, and the signaling will be more specific than the media expects. Warsh will begin shifting the institution's focus from headline CPI to core, portraying the US-Iran war-driven energy price spike as transitory. He will signal that the 2% target has more room for flexibility than the market is currently pricing, treating it as a long-term average rather than a hard monthly ceiling every single data print must obey. He will soften forward guidance, using a tone that suggests a more discretionary reaction function. He will almost certainly initiate a formal monetary policy framework review targeted for completion by 2027. None of these are rate cuts. But all of them are the institutional restructuring that lets rate cuts arrive later without being read by the bond market as political capitulation.

By the end of 2026, the framework review will be public. By mid-2027, a visible Treasury-Fed accord will be announced or formally negotiated. By the end of 2027, the federal funds rate will be 250 to 325 basis points lower than its current level. The Fed will be conspicuously ignoring service inflation measures in the 3-4% range, while nominal GDP runs at 5-6%. Gold continues to rally because financial repression is precisely the environment gold is priced for. The dollar weakens enough to clear foreign duration buying. Cryptocurrencies compound because the substrate transition runs independently of monetary policy, and the architecture's institutional guarantee just became more concrete with 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 sustainably exceed 5.5%, or the term premium persistently stays above 1.5%, or the 10-year real yield stays above 2.75%, then the architecture will break from the outside in, regardless of what Warsh does at the Fed. The bond market is the 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 when the bond market either gives the new Fed Chair room to install the architecture, or doesn't. If it gives room, the cycle extends at least until 2027, possibly into 2028. Risk assets compound. Cryptocurrencies and AI capex names are the largest beneficiaries. If the bond market revolts over hot inflation data in the next six months, the architecture risks failing before the operation can 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 on top of a 1946-1955 financial repression architecture, with AI replacing the IT cycle as the productivity engine. His tech investor background is the key credential, 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 agreements with China, Japan, South Korea, the Gulf, and a broader multipolar intermediary network, while Warsh runs Fed policy consistent with Treasury's funding needs. Both operators are necessary. 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 the real yield. These are the variables that determine whether the architecture executes or breaks.

The market is still pricing the conventional inflation fight. This framework sees the 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 on its own.

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