Federal Reserve "Successor" Reversal: From "Loyal Doves" to "Reformers," Has the Market Script Changed?

Author: Frank, MSX Research Institute

After seeing the last person, Trump’s thoughts have once again changed.

Just as Wall Street was almost certain that the new Fed Chair would be Kevin Hassett, last week, a recent meeting at the White House between Trump and former Fed Governor Kevin Warsh once again added suspense to the betting.

Unlike previous perfunctory meetings, after this one, Trump’s attitude toward Warsh shifted subtly but significantly, clearly giving Warsh more recognition, even telling The Wall Street Journal in an interview: “I think both Kevins are great,” with Warsh now alongside Hassett as a leading candidate for Fed Chair.

The shift from Hassett to Warsh in the “dual Kevin race” not only signifies a personnel change from “loyal dovish” to “Fed reformist,” but essentially reflects a strategic contest over the dollar liquidity logic in the next four years (see also “The New Fed Leader Outlook: Hassett, Coinbase Holdings, and Trump’s ‘Loyal Doves’”).

In other words, Trump’s comment that “both are great” introduces a huge uncertainty for the market.

1. From Hassett’s “solo act” to Warsh’s “dual Kevin” contest

Capital markets are always the most honest. On Polymarket, the market’s sharp-sensing funds have already repriced this “succession drama.”

As of December 16, when this article was written, in the betting pool for “Who will Trump nominate as Fed Chair?” Warsh’s probability of winning has surpassed 45%, overtaking Hassett (42%) and becoming the new front-runner.

Just two weeks earlier, in early December, Hassett still held an overwhelming advantage with over 80%, while Warsh and other “also-rans” had single-digit probabilities (Update: As of December 17, Hassett again overtook Warsh, with 53% to 27%, once again leading).

What exactly happened to cause this sudden reversal of the seemingly clear situation? After analyzing publicly available information, Warsh’s sudden rise and Hassett’s fall are most likely due to the details of their “one step forward, one step back” moves.

First, Warsh’s rise can be attributed to his having a direct and solid relationship network within Trump’s core circle.

Compared to Hassett’s role as a “staffer,” Warsh’s personal ties to Trump are closer, thanks to Warsh’s father-in-law—billionaire and Estée Lauder heir Ronald Lauder, who is not only a financial backer of Trump but also a longtime college classmate and close friend.

With this relationship, Warsh has not only advised the transition team but is also naturally viewed by Trump as “one of us.” Meanwhile, Warsh is also a close associate of another of Trump’s key figures, current Treasury Secretary Janet Yellen, and as mentioned earlier, Trump once considered nominating Yellen as the next Fed Chair.

In addition to personal connections, Warsh has also gained endorsements from the “professional circle.” According to FT, sources say that Jamie Dimon, CEO of JPMorgan Chase, recently expressed support for Warsh at a closed-door summit of asset management giants, bluntly warning that Hassett might push for aggressive rate cuts to please Trump, which could trigger inflation backlash.

This reflects, to some extent, the prevailing sentiment among Wall Street elites, and their collective support undoubtedly boosts Warsh’s chances. During last week’s meeting between Trump and Warsh, this trust was confirmed—Trump revealed Warsh is his top choice and said Warsh’s views on monetary policy are “broadly aligned” with his own, even rarely consulting him when setting rates, though not necessarily following his advice.

In contrast, Hassett, who was previously considered a safe choice, seems to have made a tactical mistake: before officially receiving a nomination, he attempted to demonstrate his “independence” to the market prematurely.

In several public statements last week, to address concerns from bond markets about his “lack of backbone,” Hassett deliberately distanced himself from Trump. For example, when asked how much Trump’s opinions influence Fed decisions, he responded, “No, his opinions will carry no weight… Only when his views are reasonable and supported by data do they matter,” even adding, “If inflation rises from 2.5% to 4%, then we can’t cut rates anymore.”

Objectively, this textbook-style “central bank governor speech” might reassure bond traders, but it could also anger Trump, who is extremely eager to maintain control. Interestingly, after these remarks were made public, Trump’s meeting with Warsh began to appear in the media.

After all, Trump now needs a “obedient” partner, not another Powell-like “preacher.” For future monetary policy control, regardless of Hassett’s original intentions, such hurried disavowals are likely to be seen by Trump as a serious “minus point.”

2. Warsh: The “insider” who was once one step away from the “Fed throne”

In fact, Warsh is not a latecomer who suddenly appeared. During Trump’s first term, he was the person who “almost got everything but ultimately missed out.”

Few now remember that Jerome Powell, whom Trump has been criticizing daily, was actually appointed Fed Chair by Trump himself in 2017.

What is less known is that the ultimate showdown back then was between Powell and Warsh. At that time, Warsh was the youngest-ever Fed Governor (age 35), and a key aide to Bernanke during the 2008 financial crisis. However, he ultimately lost out to Powell, who was strongly promoted by then-Treasury Secretary Mnuchin.

Interestingly, after four years, Trump seems to be correcting that “mistake”—last year, The Wall Street Journal cited sources saying that after re-election, Trump considered appointing Warsh as Treasury Secretary.

It can be said that Warsh has never left Trump’s line of sight, always “in the emperor’s heart.”

This is also thanks to Warsh’s nearly perfect resume: Stanford undergraduate, Harvard Law PhD, former Morgan Stanley executive, and core economic advisor in the Bush Jr. administration:

• During college, he majored in Economics and Statistics at Stanford University, then attended Harvard Law School to study Law and Economic Regulatory Policy, and also completed courses on Capital Markets at Harvard Business School and MIT Sloan School of Management. Not only is he professionally trained, but he also has a cross-disciplinary background spanning law, finance, and regulation;
• After graduating, he worked for many years in Morgan Stanley’s M&A department, serving as a financial advisor for multiple industries, until resigning in 2002 from his role as Vice President and Executive Director at Morgan Stanley;
• After joining the Bush Jr. administration, he served as Special Assistant to the President for Economic Policy and Executive Secretary of the National Economic Council, providing advice on issues related to the US economy, capital markets, banking, and insurance to the President and senior officials;

Coupled with his background in billionaire families, it is no exaggeration to say that over the past twenty years, from Morgan Stanley to the National Economic Council under Bush Jr., and then as a Fed Governor, Warsh has been active in the top circles of global finance.

Therefore, being familiar with Wall Street’s rules and being part of Trump’s core social circle—this dual attribute is precisely what enabled him to turn the tide against Hassett at critical moments.

3. Two “Kevins,” two different scripts

Although both Hassett and Warsh are named Kevin, their scripts prepared for the market are completely different.

If Warsh truly takes the helm, we are unlikely to see the “rate cut frenzy” like Hassett’s, but rather a high-level surgical operation targeting the Fed’s QE policy and mission framework.

This stems from Warsh’s consistent stance over the past fifteen years as a “counter-QE” advocate—one of the sharpest critics of the Fed’s balance sheet expansion. He has publicly condemned the Fed’s balance sheet abuse multiple times, even resigning in 2010 in protest against QE2.

His logic is very clear and hardline: “If we quiet down the printing press, our interest rates can actually be lower,” meaning Warsh aims to use shrinking the monetary base (QT) to suppress inflation expectations, thereby creating room to lower nominal interest rates. This is a difficult “space-for-time” operation designed to end the “money-dominated” era of the past fifteen years.

Regarding rate cuts, Warsh has also recently published articles criticizing the Fed for allowing inflation to rise sharply, and he has stated that even if Trump’s tariffs are implemented, he would support further rate cuts. According to Deutsche Bank’s analysis, if Warsh takes over, the Fed might deploy a unique combination: supporting rate cuts alongside aggressive balance sheet reduction (QT).

Moreover, unlike Powell’s attempt to fine-tune the economy, Warsh advocates that the Fed should “do as little as possible.” He believes “forward guidance is almost useless in normal times,” and criticizes the Fed’s “mission creep” into climate change, inclusivity, and other issues. He insists that the Fed and Treasury should each do their own jobs— the Fed managing interest rates, and the Treasury managing fiscal accounts.

Of course, despite such sharp criticism, Warsh remains fundamentally a “reformer,” not a “revolutionary.” He advocates for “Restoration” of the Fed’s core framework, retaining its essential functions but removing the mistakes of the past decade. If he leads, the Fed will return to its primary mission: defending currency value and price stability, rather than letting monetary policy take on fiscal responsibilities.

Overall, a Warsh-led Fed might narrow its policy scope and gradually normalize its balance sheet over time.

However, for crypto and tech stocks that are accustomed to liquidity “feeding,” Warsh’s rise would be a huge challenge in the short term, as he views unlimited liquidity not only as poison but also as something to be “destroyed.”

But in the long run, Warsh might actually be a true “ally”—thanks to his strong support for free markets and deregulation, and his optimistic outlook on the US economy, believing that AI and deregulation will trigger a productivity boom similar to the 1980s. He is also one of the few senior officials who has actually invested in crypto (previously the Basis stablecoin project and the crypto index fund manager Bitwise), making him a “knower” in the field.

This undoubtedly lays a foundation for the healthy rise of financial assets after “de-bubbling” in the long term.

Of course, Warsh and Trump are not perfectly aligned. The biggest risk lies in trade policy. Warsh is a staunch supporter of free trade and has publicly criticized Trump’s tariffs as potentially leading to “economic isolationism.” Although he recently stated that “even with tariffs, I support rate cuts,” this threat still exists.

How he balances “maintaining dollar credibility” and “meeting Trump’s tariff/rate cut demands” will be the biggest test he faces in the future.

In conclusion: There is only one director

In short, the essence of this “dual Kevin” contest is a choice between two market paths.

Choosing Hassett is a party of liquidity, with the Fed likely to become a cheerleader for stocks, potentially sending the Nasdaq and BTC to the moon in the short term, but at the cost of long-term runaway inflation and further collapse of dollar credibility.

Choosing Warsh, on the other hand, likely means a surgical reform—markets may experience short-term pain from tightening liquidity (“withdrawal symptoms”), but with “deregulation” and “sound money” backing, long-term capital and Wall Street bankers will feel more secure.

But regardless of who ultimately wins, one fact remains unchanged: in 2020, Trump could only criticize Powell on Twitter; by 2025, with a landslide victory, Trump will no longer be content to be just an observer.

The main actor on the stage—Hassett or Warsh—may determine the plot’s direction, but the true director of this show has already firmly become Trump.