Warsh at the Fed: A Threat to Trump's Low-Rate Goal?

China is shifting its economic strategy, turning to the services sector as a new engine for growth as the nation grapples with weak household confidence, a persistent property slump, and slowing exports.

The State Council recently unveiled a comprehensive plan to boost services consumption, signaling a pivot away from traditional stimulus measures that have proven less effective in compelling consumers to spend. The new policy framework targets a wide range of experience-based industries, including tourism, elderly care, and live events.

Beijing's New Plan: From Goods to Experiences

According to a cabinet notice, the government's work plan aims to "accelerate the cultivation of new growth drivers in service consumption" and "improve and expand the supply of services."

This initiative represents a deliberate move to tap into new areas of domestic demand. Key focus areas include:

• Tourism: Promoting self-drive travel, expanding visa-free entry, adding tax-refund points, and upgrading infrastructure like train stations and scenic rail routes.

• High-End Leisure: Advancing high-quality yacht consumption by overhauling safety regulations and building public docks and berths.

• Live Events: Increasing the supply of high-quality sports events and encouraging the introduction of top international competitions.

This shift comes as households show reluctance to purchase big-ticket items, even with subsidies for cars and appliances, pushing Beijing to explore new ways to unlock consumer spending.

Why China is Shifting Its Economic Strategy

The policy pivot is a direct response to persistent headwinds in the domestic economy. In 2025, retail sales grew by 3.7%, lagging behind the 5.9% growth in industrial output and the overall economic expansion of 5%.

Deflationary pressures remain a major concern. Consumer inflation was flat last year, while producer prices fell for the third consecutive year, squeezing corporate profits and weighing on wage growth.

Early data from China Beige Book indicated a sharp slowdown in services consumption in January, with travel, hospitality, and restaurant chains all reporting widespread weakness. Furthermore, concerns are growing that the export boom that previously supported the economy may be difficult to sustain.

Tapping into Changing Consumer Habits

Despite the challenging economic backdrop, policymakers see an opportunity in evolving consumer preferences. A quarterly survey by the People's Bank of China for the fourth quarter of 2025 revealed a notable trend: the share of respondents planning to increase spending on social and entertainment activities hit an eight-year high. In contrast, interest in major purchases remained significantly below pre-pandemic levels.

This shift toward experiential spending is gaining traction. "Emotional satisfaction is playing a bigger role in retail spending, with a growing focus on buying for self-expression and experiences rather than for materialistic possessions or brand prestige," noted analysts at S&P Global.

Policy and Financial Support for the Service Sector

To support this strategic shift, the State Council's plan includes dedicated financial measures. Banks will be encouraged to increase credit lines for service-sector firms, and qualified companies in culture, tourism, education, and sports will be permitted to raise capital through bond issuance.

Developing the service sector aligns with China's long-term policy objectives. Services consumption per capita reached 46.1% last year, a figure that still trails many advanced economies, indicating significant potential for growth.

Moreover, the service industry is more labor-intensive than manufacturing and stands as China's largest source of employment. This is a critical consideration for policymakers trying to address high youth unemployment. According to the 2020 census, the tertiary sector accounted for over 48% of jobseekers aged 16 to 24.

Will the Services Push Be Enough?

While the government's focus on services is clear, some economists caution that this approach alone may not be a silver bullet. The success of the plan hinges on tackling deeper structural problems, particularly those related to household income and social welfare.

"Boosting consumption requires restoring consumer confidence to free up high saving rates," said Ludovic Subran, chief investment officer at Allianz, in a CNBC report. He added that a true rebalancing toward domestic demand requires "giving jobs, time and income to consumers."

Logan Wright, a partner at Rhodium Group, argued for strengthening the social safety net. "If the government were to invest more in social services, households would feel safer and be more likely to spend more liberally," he said.

Final consumption expenditure in China accounted for 56.6% of GDP in 2024. While this is an increase from 49.4% in 2010, it remains well below levels in the United States, the UK, and Japan. Economists suggest it will take years for growth in services consumption to fully offset the decline in the property market, meaning weak domestic demand could continue to weigh on the economy in the near term.

President Donald Trump has nominated former Federal Reserve Governor Kevin Warsh to run the central bank, a choice that raises immediate questions about the future of U.S. monetary policy. With deep ties to both the president and Wall Street, Warsh has spent years as a vocal critic of the Fed. Now, he faces the immense challenge of turning his reformist ideas into reality.

Figure 1: Former Federal Reserve Governor Kevin Warsh, President Trump's nominee for Fed Chair, has been a vocal critic of the central bank's policies.

The market is watching to see how quickly he will cut interest rates and how aggressively he will pursue the "regime change" he has long advocated for at the institution he is set to lead.

The Interest Rate Dilemma

Warsh’s first major test will be navigating the gap between the White House's demands and economic reality. President Trump has publicly called for aggressive interest rate cuts, potentially down to crisis-level lows of around 1%.

This puts Warsh in a difficult position. During his previous tenure as a Fed governor from 2006 to 2011, he was known as an inflation hawk. Such a steep rate cut may be a step too far for him, and he will face pushback from his 18 policymaking colleagues and the underlying economic data.

So far, financial markets aren't expecting a dramatic shift. Following Trump's announcement, rate futures continued to price in just two quarter-point cuts in 2026, which would bring the rate down from its current range of 3.50% to 3.75%.

From Think-Tank Critic to Policy Maker

For years, Warsh has criticized the Federal Reserve from the outside, publishing op-eds and delivering speeches that called for fundamental reform. Now, he must convert that rhetoric into actionable policy, a task that is easier said than done.

Implementing his vision will require navigating a complex political landscape. Any significant changes must win approval from:

• The Fed's Board of Governors

• President Trump and Treasury Secretary Scott Bessent

• The U.S. Congress, if changes to the Federal Reserve Act are needed

"He's been an outspoken critic of the Fed's balance sheet and groupthink," noted Heather Long, chief economist for Navy Federal Credit Union. "More clarity is needed on how far he intends to go." She added that Warsh is a "pragmatist who won't want to lose market trust by making cuts that aren't warranted" and that his history of inflation concerns suggests he "won't allow the economy to overheat."

Still, Warsh's confrontational style is well-known. In a July interview on Fox News, he spoke of the need for "breaking some heads" at the Fed—a comment that now applies to the very people who will become his colleagues.

Tackling "Institutional Drift"

At the heart of Warsh's critique is the Fed's "institutional drift." Over the past two decades, especially during the financial crisis and the pandemic, the central bank's power expanded significantly. It now operates as a complex hybrid, wielding monetary policy powers while also holding regulatory authority typically found in the executive branch.

This unique structure has created confusion, even puzzling Supreme Court justices about the Fed's exact place within the federal government. This legal ambiguity has real-world consequences, such as in the court case concerning whether President Trump could fire Governor Lisa Cook.

Some of Warsh's desired changes could be managed internally. Under Chair Jerome Powell and the Trump administration, the Fed has already withdrawn from a global climate change consortium and scaled back its diversity, equity, and inclusion initiatives. As chair, Warsh could further control the Fed's messaging by reducing the number of public speeches by other governors and the 12 reserve bank presidents.

Reforming Fed Models and Guidance

Warsh has also set his sights on the Fed's internal processes. Analysts at TD Securities noted that he "appears to be predisposed to make more fundamental changes...particularly in the way the committee approaches forward guidance, relying too much on near-term forecasting and increased data-dependence."

This criticism could lead to an early showdown. At his final press conference, current Chair Jerome Powell issued a direct challenge to his successor: "If it's a question of using better models, bring them on. Where are they? We'll take them."

The Balance Sheet Conundrum

Perhaps the biggest target of Warsh's criticism has been the Fed's massive balance sheet. He opposed some of the "quantitative easing" programs while he was a governor, even resigning partly in protest despite publicly voting with then-Chair Ben Bernanke.

However, he may find his hands tied on this issue as well. The balance sheet is no longer just a crisis tool; it is now deeply integrated into how the Fed controls interest rates, provides liquidity to the banking system, and supplies dollars to the global economy.

Unless that fundamental mechanism changes, there is a limit to how much the balance sheet can shrink. As outgoing Atlanta Fed President Raphael Bostic recently stated on CNBC, its current size "is about right," adding that "when the economy grows the balance sheet needs to grow with it."

A divide has emerged within Japan's leadership over the nation's currency, with Prime Minister Sanae Takaichi highlighting the benefits of a weaker yen even as her own finance ministry signals a readiness to intervene to support it.

Takaichi: Weak Yen is a "Major Opportunity"

Speaking at a campaign event, Prime Minister Takaichi offered a counter-narrative to the prevailing view that the yen's decline is a problem. "People say the weak yen is bad right now, but for export industries, it's a major opportunity," she stated.

Takaichi pointed to specific sectors benefiting from the currency's depreciation. She explained that for industries like food and automobiles, the weaker yen has provided a crucial "buffer," particularly against U.S. tariffs. "That has helped us tremendously," she added.

While not explicitly favoring a weak or strong yen, the Prime Minister emphasized her goal of building an economic structure that is resilient to currency fluctuations by boosting domestic investment. Her comments come as she seeks a mandate in the snap election scheduled for February 8 to push forward her economic reflation agenda.

Finance Ministry Warns of Currency Intervention

The Prime Minister's perspective contrasts sharply with the position of Finance Minister Satsuki Katayama. As the yen fell to 18-month lows, Katayama has repeatedly threatened to take action to stabilize the currency.

The sustained decline of the yen has been identified as a key contributor to inflation, which in turn has led the central bank to signal potential interest rate hikes.

Market Reacts to Intervention Signals

Markets have already shown sensitivity to the possibility of official action. The yen has spiked on three separate occasions, most notably following reports that the New York Federal Reserve was inquiring with banks about potential exchange rates for buying yen on behalf of Japanese authorities. Such moves are often interpreted by traders as a precursor to direct market intervention.

This tension over the currency is unfolding against a backdrop of wider economic strain. The combination of a protracted decline in the yen and a recent surge in Japanese government bond yields to record highs is reflecting growing investor concern about the health of the nation's finances.

Japanese Prime Minister Sanae Takaichi has highlighted the benefits of a weaker yen, a view that contrasts with warnings from her finance ministry.

Japanese Prime Minister Sanae Takaichi on Saturday championed some of the benefits of a weaker yen, a position that stands in stark contrast to repeated threats from her own finance ministry to intervene and support the nation's battered currency.

Takaichi's Pro-Export Stance

During a campaign speech for an election scheduled for the following weekend, Takaichi offered a different perspective on the yen's decline. "People say the weak yen is bad right now, but for export industries, it's a major opportunity," she stated.

Takaichi elaborated that for key sectors like food and automobiles, the weaker currency served as an important buffer against U.S. tariffs. "That has helped us tremendously," she added.

While she did not express a preference for either a strong or weak yen, Takaichi emphasized her goal of creating an economic structure resilient to currency swings by promoting domestic investment.

Finance Ministry Signals Intervention

The prime minister's comments diverge sharply from the position of Finance Minister Satsuki Katayama. As the yen has fallen to 18-month lows, Katayama has repeatedly threatened to take action to counter its slide.

The currency's depreciation has been a factor in rising inflation, prompting Japan's central bank to signal that further interest rate hikes may be necessary.

Market Reacts to Intervention Threats

Currency markets have remained on edge, with the yen spiking three separate times in response to intervention chatter. One of the most significant moves followed reports that the New York Federal Reserve was making inquiries with banks about potential exchange rates for buying yen—a step often seen as a prelude to official intervention.

The yen's prolonged decline, alongside a recent surge in Japanese government bond yields to record highs, underscores investor concerns about the stability of the nation's finances. As she campaigns for the snap election on February 8, Takaichi is seeking a clear mandate for her economic mission to reflate the economy.

The U.S. Treasury has taken a landmark step in its economic pressure campaign against Iran, sanctioning two UK-registered cryptocurrency exchanges for the first time. The move marks a significant expansion of Washington's sanctions program, directly targeting digital asset platforms believed to be part of Iran's alternative financial infrastructure.

According to a statement from the Treasury Department's Office of Foreign Assets Control (OFAC), the action is part of a broader crackdown on Iranian officials and networks. These groups are accused of violently suppressing domestic dissent while simultaneously using unconventional financial channels to circumvent international sanctions.

Crypto Platforms Linked to Illicit Finance

The sanctions specifically name two UK-based exchanges: Zedcex Exchange Ltd. and Zedxion Exchange Ltd. U.S. officials allege these platforms are connected to Babak Morteza Zanjani, a prominent Iranian businessman previously convicted for embezzling oil revenue.

The Treasury claims Zanjani was released from prison and later used by the Iranian state to move and launder funds, providing financial support for projects tied to the Islamic Revolutionary Guard Corps (IRGC).

The scale of the activity is substantial. OFAC reported that Zedcex alone has processed more than $94 billion in transactions since its registration in 2022. "This marks OFAC's first designation of a digital asset exchange for operating in the financial sector of the Iranian economy," the Treasury stated.

A Wider Crackdown on Iranian Officials

The designation of the crypto exchanges was part of a comprehensive sanctions package targeting key figures within Iran's regime. Among those sanctioned is Eskandar Momeni Kalagari, Iran's minister of the interior, whose role includes overseeing the country's Law Enforcement Forces.

OFAC also sanctioned senior IRGC commanders and security officials in multiple provinces, citing evidence of lethal force against protesters and widespread intimidation campaigns.

Treasury Secretary Scott Bessent accused Tehran of diverting oil revenues to weapons programs and militant proxies instead of supporting its citizens. "Treasury will continue to target Iranian networks and corrupt elites that enrich themselves at the expense of the Iranian people," Bessent said, adding that the U.S. will pursue networks that use digital assets to finance illicit activity.

Iran's Growing Use of Digital Currency

The sanctions come as evidence mounts of Iran's strategic use of cryptocurrencies to navigate economic challenges.

A recent report from blockchain analytics firm Elliptic revealed that Iran's central bank acquired over $500 million in Tether (USDT). This accumulation occurred as the Iranian rial lost approximately half its value over eight months. Elliptic suggests the central bank likely used the USDT on the local exchange Nobitex to purchase rials, mirroring a traditional central bank intervention but executed through crypto markets. The stablecoins may have also been used to settle international trade.

Iranian President Masoud Pezeshkian has accused leaders from the United States, Israel, and Europe of exploiting Iran's economic struggles to incite recent nationwide protests and provide agitators with the means to "tear the nation apart."

In a live broadcast on state television, Pezeshkian claimed these foreign powers sought to destabilize the country. "They rode on our problems, provoked, and were seeking—and still seek—to fragment society," he stated.

Figure 1: Iranian President Masoud Pezeshkian claims Western powers supplied resources to protesters with the goal of dividing the nation.

Pezeshkian argued that external actors manipulated genuine grievances to achieve a political agenda. "They brought them into the streets and wanted, as they said, to tear this country apart, to sow conflict and hatred among the people and create division," he said, adding, "Everyone knows that the issue was not just a social protest."

Unrest, Crackdown, and a Heavy Human Toll

The two-week wave of protests, which erupted in late December, was initially sparked by an economic crisis defined by soaring inflation and rising living costs. The demonstrations eventually subsided following a bloody crackdown by clerical authorities.

Casualty figures vary significantly. According to the U.S.-based human rights group HRANA, at least 6,563 people were killed, including 6,170 protesters and 214 security forces. However, Iranian Foreign Minister Abbas Araqchi provided a different count to CNN Turk, stating that 3,100 people were killed, a figure that included 2,000 security forces.

Figure 2: International vigils and protests draw attention to the severe crackdown in Iran, with signs calling for an end to the violence.

US Weighs Options as Regional Tensions Mount

The situation has drawn sharp focus from Washington. U.S. President Donald Trump has repeatedly expressed support for the demonstrators and warned that the U.S. was prepared to act if the killing of protesters continued. On Friday, U.S. officials confirmed that Trump was reviewing his options but had not yet decided on potential military strikes against Iran.

Adding to the military tension, the Israeli news website Ynet reported on Friday that a U.S. Navy destroyer had docked at the Israeli port of Eilat.

In an effort to de-escalate, regional allies including Turkey, the United Arab Emirates, and Saudi Arabia have engaged in diplomatic outreach to prevent a direct military confrontation between Washington and Tehran.

Diplomacy Stalls Over Missile Program

Despite these efforts, diplomatic progress remains stalled. The United States is demanding that Iran curb its missile program as a precondition for resuming talks. Tehran has unequivocally rejected this demand.

Speaking in Turkey on Tuesday, Foreign Minister Araqchi declared that Iran's missiles would "never be the subject of any negotiations." He asserted that Tehran was prepared for either negotiations or warfare and was ready to work with regional countries to promote peace and stability.

Araqchi also dismissed any possibility of internal collapse, telling CNN Turk that "regime change is a complete fantasy." He added, "Our system is so deeply rooted and so firmly established that the comings and goings of individuals make no difference."