Kevin Warsh looks on during his swearing-in ceremony at the White House in Washington, DC, on May 22, 2026.
At a swearing-in ceremony at the White House hosted by US President Donald Trump on May 22, the 56-year-old Kevin Warsh embarked on his four-year term as the 17th chair of the Federal Reserve System (Fed).
In a recent exclusive interview with South, Xiao Geng, Chairman of the Hong Kong Institution for International Finance and Professor of Practice in Economics of the Chinese University of Hong Kong, Shenzhen, noted that Warsh would recalibrate the Fed's core task, namely, controlling inflation.
Priority for the new Fed chair is to control inflation
"Warsh must control inflation after taking office, which is a tough task for the Federal Reserve," Xiao underlined. To reach that goal, he predicted that the Warsh-led Fed may raise the federal funds rate, or not lower it, or lower it less frequently, given an ad hoc situation.
Also, according to Xiao, Warsh seeks to reduce the balance sheet to curb long-term inflation. "The move will impact the US economy as tightening dollar liquidity may have a short-term negative fallout on the US economy. "
The US has expanded its balance sheet relentlessly after the global financial crisis. The expansion was, in Xiao's estimate, four to five times greater than that during the global financial crisis. From 2020 to 2024, the massive expansion of the Fed's balance sheet led to severe inflation in the US.
Goldman Sachs unveils that since 2008, the Fed's balance sheet has expanded by approximately $5.8 trillion, now accounting for about 21% of the US GDP.
Warsh and some American elites are quite convinced that Artificial Intelligence (AI) will drive a productivity revolution domestically.
As Xiao analyzed, this will lead to a deflationary trend, such as declining wages and the replacement of labor, putting pressure on the US economy and ordinary people in the short term. Also, it will create new jobs and the long-term growth rate will increase, potentially by one or even two percentage points.
"Due to the optimism of the AI and robotics revolution, they believe that inflation can be managed by both reducing the balance sheet and not raising the federal funds rate," Xiao added.
Warsh's reform aims to build market confidence
Having voiced to "lead a reform-oriented Federal Reserve", Warsh intends to establish a new framework for addressing inflation, reduce the Fed's assets and liabilities to a reasonable size and adjust the Fed's information dissemination mechanism.
"These reforms aim to breaking away from a long-standing mindset," Xiao noted. In the past, the Fed acted in line with the market, reached concerted views, and focused on short-term economic growth.
Sometimes the Fed attempted to collaborate with administrative departments. For example, it cut rates before and after Donald Trump took office to support the economy. However, the Fed later discovered that after the rate cuts, yields for long-term US Treasury bonds rose.
Normally, if rates are cut in the short term, they should also be cut in the long term. However, the market believed that such rate cuts would trigger future inflation, leading to a loss of credibility in the Fed.
This resulted in higher borrowing costs for long-term US Treasury bonds. Warsh rigorously opposed past traditions and criticized the Fed's past deeds.
"Warsh believes the Fed doesn't need to cater to short-term market expectations, nor does it need to maintain internal unity," noted Xiao. The new Fed chair believes that internal debate is essential to clarifying issues. Most importantly, the Fed needs to return to its control over long-term inflation and rebuild market confidence in its ability to manage inflation.
Reporter | Zhang Ruijun
Photo | CFP
