Blain’s Morning Porridge Feb 3, 2026 – We have to talk about Kevin…
“I would say [Fed Policy] has been in some sense Reverse Robin Hood.”
The nomination of Kevin Warsh as next Fed Chair has been rationalised as positive for stability and managing Trump. But will a new name on the desk means certainty will return? Nothing really changed within the Administration – Trump remains Trump and has a massive War Chest to fight the coming bitter Midterms.
There was a relieved nodding of heads when Kevin Warsh was announced as Trump’s nominee for the Chair of the Federal Reserve last week. Most Fed watchers immediately spotted the multiple inconsistencies swirling around the appointment – and sought to rationalise them in a positive fashion. Warsh is an inflation hawk highly critical of QE (the manipulation of interest rates), who wants to shrink the Fed balance sheet, while Trump wants a submissive Fed Chair who will ease, ease and ease.
The consensus swiftly emerged of how Trump had been “persuaded” to appoint a credible Fed Chair, concluding Warsh has the necessary “people” skills to “manage” Trump’s assaults on the Fed’s independence and the potential damage he can do to America’s financial standing, the dollar and, critically, the Treasury market.
Warsh is already squaring the problematic hawk vs dove circle by arguing the massive productivity gains AI is going to create will allow lower rates. (He says he’s focused on Data, but AI gains are, thus far, largely anecdotal.) How is that going to play out if the AI boom fizzles and an Oracle debt crisis triggers a run? (That will be an interesting one for Warsh to explain. Who knew the Fed Chair’s primary function would be to manage the President’s monetary policy demands? That authoritarianism 101.)
Warsh is being seen by the market in the same light as his former colleague in Stanley Druckenmiller’s funds, Treasury Secretary Scotty Bessent, who is currently perceived as the adult courtier in Trump’s inner closet, mellowing the petulant president’s worst financial tantrums, outbursts, demands and protectionist instincts. (There are stories Bessent wasn’t keen on Warsh for the job – apparently fearing Warsh’s “film-star looks” might tarnish his own lustre…)
What is clear is that The Fed is going to change under Warsh and Bessent. Last year, Bessent railed against the Fed’s “gain of function”, and Warsh is arguing for a “reduced” scope for the Fed’s oversight – a new accord with the Treasury allowing the Fed to focus on setting rates, while Treasury would focus on bond issuance and yields. That could get really gnarly if AI productivity “gain” result in zero US jobs – but allowing even lower rates! (In my own simplistic way I think of the Treasury as the liability side of the national balance sheet, and the Central Bank as the asset side – that allows for all kinds of accounting and liability management tricks to be played!)
I give Warsh credit for his objections to QE – bond buying and ultra-low rates caused massive distortions in the way the economy works. The QE era did not create jobs, growth or new capacity, but focused investment into financial assets and stock buybacks, creating the income and opportunity inequalities that fostered MAGA/Trump populism, and still overvalued stock markets.
Interestingly, US economic growth went from slow to overdrive following the end of QE as rates normalised at 4-4.25% for 10-yr yields, suggesting there is a healthy level of inflation and rates for the economy!
I can’t understand why Warsh is so fixated on reducing the Fed’s balance sheet through QT – the Fed still holds some $3.5 trillion of Treasuries, (and more CMBS), which will simply mop up liquidity if sold, and cause the yield curve to steepen, (it’s already at its steepest in years) making mortgages more expensive, thus further hitting Trump’s standings in the polls. (Of course, Warsh might just be making noise about supporting QT to sound hawkish and distract markets from whatever promises he made to Trump about easing in return for the job – just saying…)
However, the talk of an adult-in-the-room Fed Chair may be missing Trump’s own often excellent political instincts – honed by his inner core of Project 25 extremists led by closest political advisor, the fearsomely single-minded Stephen Miller. (If you want to scare yourself, read Rolling Stone’s take down of Miller last week: The Worst White House Aide in History. It describes Miller as the “ultimate authoritarian apparatchik”.)
Trump will be very aware his voter base is slipping away and figured for himself he needed a Fed Chair the market can literally “rally” around. In the run up to the November Midterms, Trump needs the upside of continuing market strength to generate that critical “feelgood” factor to help him through the polls.
The economic picture isn’t as rosy as Trump would like us to believe. It’s becoming increasingly clear US manufacturing and productivity outside AI infrastructure is flatlining. People are asking where the $1 trillion Japan promised to invest is. His blatant lies about the US Economy are becoming embarrassing. Last week, in an opinion piece in the WSJ he wrote bragging about how his tariff policies led to zero inflation, rising real incomes, cutting the deficit by 27% and the trade deficit by 77%, are all easily debunked. (The Trade deficit soared 94% in November!)
But bigger factors are at play in the US – Trump has amassed a record $430 million War Chest from Crypto firms and Tech Billionaires to fight the Midterms. In return for donations Trump has been more than willing to open regulatory doors – especially for Crypto in enabling stablecoin adoption… which poses all kinds of regulatory risks. (Some crypto shill will tell me that’s rubbish, that stable coins are safe… so was the dollar!)
Trumps targets at the midterms will not just be Democrats, but Republicans who threaten to step out of line. Why a second-term president needs such a funded pile is a good question? It will be to maintain his grip on the Party. The sums that have been pumped into Trump’s control were detailed in the FT last night: “Tech billionaires fuel Donald Trump’s $429mm haul ahead of midterms”.
The scariest thing I’ve heard in recent months was talking to California bankers in Austria last week…. They were concerned as to what might follow a Democrat clean sweep in November. One told me: “The next insurrection will be better planned and properly organised.”
Out of time and back to the day job…
Bill Blain
Author of the Morning Porridge
Advisor – Spitfire Strategic Capital
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Bill, the war chest is to help Trump’s bid to change the constitution to allow him a third term. It was not that long ago that FDR served nearly four terms before dying in office. Everyone says it will never happen but watch this space!