The President’s nomination of Kevin Warsh as Fed Chair introduces headline risk, but it is unlikely to materially alter the near-term policy trajectory. While Warsh is often characterized as hawkish based on his tenure as a Fed governor, the economic and institutional backdrop he would face limits the scope for additional easing.
Warsh served as a Fed governor from 2006 to 2011. Although he never dissented on FOMC votes, his public commentary consistently emphasized inflation risks and cautioned against the Fed expanding beyond its core mandate. He has long argued that monetary policy cannot compensate for flawed fiscal or regulatory policy and has criticized the Fed’s growing involvement in broader economic and social objectives. More recently, however, Warsh has supported lower short-term rates alongside balance-sheet reduction, arguing that the combination could help lower yields across the curve.
Confirmation appears likely, though timing could be delayed by political considerations in the Senate. For markets, however, the relevant issue is not Warsh’s philosophy but the macroeconomic and policy constraints he would inherit.
Growth and demand remain resilient. Real GDP growth has run above trend in recent quarters and is likely to remain strong into early 2026, supported by solid consumer spending, wealth effects from a prolonged equity bull market, and continued AI-related capital investment. Potential fiscal support, including tax refunds and tariff rebate checks, adds upside risk to demand.
Inflation is the binding constraint. Core PCE (personal consumption expenditures) inflation is running near 3 per cent and could rise further in the first half of 2026 as strong demand allows firms to pass through tariff-related costs. With inflation well above target and unemployment near the Fed’s longer-run objective, the policy mix argues against aggressive easing.
Financial conditions warrant caution. Elevated equity and crypto valuations, tight credit spreads, and ample liquidity suggest that financial conditions are already accommodative. Additional easing risks inflating asset bubbles rather than stabilizing growth.
Institutional realities further limit Warsh’s ability to shift policy quickly. The Fed chair is only one vote among many, and absent changes to the Board’s composition, support for near-term cuts may remain limited. While past chairs exercised outsized influence through credibility and persuasion, such authority is earned over time.
The bottom line: Warsh’s nomination does not materially increase the likelihood of near-term Fed easing. We expect two rate cuts in 2026, but they will likely come in the latter half of the year.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
Institutional investors are often blamed for the housing affordability crisis, but the reality is far more complex. While some treat housing purely as an asset play, others are actively building rental solutions to help address structural gaps.
In this week’s Housing Affordability Watch, we examine how U.S. firms like Amherst and Parkland are innovating in the rental space—from infill development to “missing middle” housing—and what lessons Canada could take from their approaches.
Read it here: What We Can Learn From Institutional Investors in Housing
Independent Opinion
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