Will the next financial crisis be triggered by Walsh?

Martin Wolf, the chief economic commentator of the Financial Times, has just published a cautionary article focusing on Kevin Warsh, who is likely to take over the Federal Reserve. The article bluntly poses the question: What do we actually see when interpreting "the Warsh era at the Federal Reserve"?

Wolf is an authority on macroeconomics. He has long focused on the independence of central banks and the boundaries of fiscal and monetary policy, and his views have significantly influenced both policymakers and markets after the 2008 financial crisis. This time, he turns his attention to this Federal Reserve chair candidate chosen by Trump, attempting to find clues about the future direction of monetary policy from Warsh's past statements and recent shifts in stance.

The article opens with a sharp question: If Warsh is confirmed as the Federal Reserve chair, will he be an inflation hawk or Trump's "lapdog"? This question is not unfounded. Warsh's inconsistent statements on monetary policy and his views on the broader responsibilities of the Federal Reserve indicate that he is a hardliner. However, his recent comments on inflation prospects and the fact that Trump chose him point in the completely opposite direction.

A deeper concern is whether Warsh is a person of conviction and judgment or merely a political weather vane. Supporting loose monetary policy when the Republicans are in power and then shifting to tightening when the Democrats are in power—this "double standard" could bring unpredictable risks to the U.S. and even the global economy. Wolf warns that under Warsh's policy framework, "the result could be another financial crisis."

The Past and Present of a "Hard Currency" Believer

From Warsh's public statements, he indeed resembles a typical "hard currency" central banker. Wolf cites Warsh's speech to the Shadow Open Market Committee in New York in March 2010, when the U.S. economy was still struggling with the deep recession following the 2008 financial crisis, but Warsh was already beginning to worry about the credibility of the Federal Reserve.

In that speech, Warsh made four core points. First, the independence of the Federal Reserve applies only to monetary policy and does not include "regulatory policy, consumer protection, or other responsibilities granted to the Federal Reserve." Second, the Federal Reserve "as the first responder must strongly resist the temptation to become the ultimate rescuer." Third, "the government may attempt to influence the central bank to keep monetary policy loose for a longer time to finance debt and stimulate economic activity." However, "the only reputation that central bankers should seek, if any, is to be remembered in history books."

The fourth point is particularly crucial. Warsh emphasized: "Central banks around the world have spent decades bringing inflation down to levels consistent with price stability. We should not risk these hard-won achievements." This almost dogmatic anti-inflation stance seemed particularly harsh in the economic environment at that time.

Position in 2025: Continuation or Disguise?

On the surface, today's Warsh seems intellectually identical to the one from 2010. In a speech delivered to the International Monetary Fund in April 2025, he not only emphasized the issue of "institutional drift" at the Federal Reserve but also criticized its "failure to fulfill important parts of its statutory responsibilities—price stability." Wash's criticism is quite sharp. He pointed out that the Federal Reserve "has facilitated explosive growth in federal spending," and that "the Fed's excessive role and poor performance have undermined the important and valuable rationale for the independence of monetary policy." His most pointed criticism is: "Since 2008, the Fed has been the most important buyer of U.S. Treasury bonds."

He further elaborated: "Fiscal dominance — that is, national debt constraining monetary policymakers — has long been considered a possible endgame by economists. My view is that monetary dominance — that is, central banks becoming the ultimate arbiters of fiscal policy — is a clearer and more realistic danger." For Wash, loose monetary policy is the road to ruin.

Why did Trump choose this "contradiction"?

This raises a perplexing question: Trump himself is the "embodiment of fiscal dominance," having consistently criticized current Chairman Powell as a "jerk" for not cutting rates faster. So why appoint a seemingly tough anti-inflationist as Fed Chairman? Beyond Wash's "handsome appearance," there must be deeper reasons behind this.

Wolf analyzed several possibilities. First, Trump may appreciate Wash's hostility towards the Fed's "awakening" over-expansion. Second, he may admire Wash's inclination towards financial deregulation. Furthermore, Wash is a relatively orthodox choice, and his appointment could soothe nervous markets (which it has so far).

But the key is: Wash "just happens" to conclude that inflation is no longer a threat due to technology-driven productivity growth. This judgment may be correct — as Wash himself pointed out, former Fed Chairman Greenspan made similar bets on the internet's impact in the 1990s. But for someone who was worried about inflation during the deep recession of 2010, this is a bold shift. Wolf commented: "If he gets his way, he will replace the Fed's 'data dependency' with an intuition. Given the massive fiscal deficits and debts in the U.S., along with rapid economic growth, this would be a gamble."

What would Wash's governance bring?

Wolf admits that he actually agrees with some of Wash's criticisms of the Fed, particularly regarding its deviation from core functions. He also agrees that the post-pandemic inflation is partly the Fed's fault: along with other central banks, it did not even consider that the surge in money supply in 2020 could lead to a jump in price levels. Wolf also agrees that the backward-looking monetary policy framework introduced in 2020 "is wrong both conceptually and practically (not to mention severely mistimed)."

The Fed as an institution also provides some comfort. As Wolf said, the Fed is far more than just the Chairman. Leadership is important, but Wash cannot crudely override the other members of the Federal Open Market Committee or even the staff, at least not in the short term.

Have the seeds of crisis already been sown?

However, concerns remain, particularly in two areas. The first concern is that Wash may be too willing to defend anything Trump wants, even if it means fully embracing fiscal dominance What is even more concerning is that he seems to intend to justify himself through a technique: while actively reducing the Federal Reserve's balance sheet, offsetting lower short-term rates with higher long-term rates.

Meanwhile, the U.S. Treasury is likely to further shift towards short-term financing. As a result, the U.S. yield curve will become steeper, with the possible outcome being an increase in short-term dollar financing demand and a decrease in long-term demand. Wolf warns that most importantly, "given the decline in bank reserves and financial deregulation, the balance sheets of the financial sector will become more fragile."

The motivation to hold dollars may also decline as short-term rates fall and inflation concerns rise. Wolf's conclusion is alarming: "The result could be another financial crisis." This is not alarmism. Looking back at history, financial crises often stem from the inherent contradictions of policy: on one hand, fiscal expansion and deregulation, while on the other, attempting to maintain the appearance of monetary discipline, ultimately leading to systemic risks accumulating in the shadows until a trigger ignites the entire chain.

What kind of Federal Reserve Chair does the market need?

At the end of the article, Wolf makes a cautious yet clear assessment: "Yes, Waller is better than many other candidates on the list. But he is a confusing figure, perhaps even confused himself." This assessment is quite incisive—an indecisive central bank governor may be more dangerous than a steadfast but incorrect one, as the market and economic entities cannot form stable expectations.

Wolf emphasizes: "The U.S. and the world need a Federal Reserve Chair who can say no to Trump." He praises the current Chair Powell for "having proven to be such a person." The article ends with an unresolved question: "Will Waller be that person?"

The answer to this question may only be revealed during the next economic or financial turmoil. But by then, the cost may have already been paid. As the title of the article suggests, whether the next financial crisis will be triggered by Waller depends on whether he chooses to be a principled central bank governor or a self-persuading defender serving political interests. From the current signs, the answer does not look optimistic. History tells us that when the independence of monetary policy is eroded, and short-term political considerations overshadow long-term economic stability, the fragility of the financial system will sharply increase. In this time of uncertainty, we might remember what Waller himself said in 2010: the "only reputation that central bankers should seek is to be remembered in the history books"—the question is, for what will he be remembered by history?