Warsh Emerges as Top Pick for Fed Chair: What's Next for Rates?

The race to lead the Federal Reserve has a new frontrunner, and markets are already reacting. Former Federal Reserve Governor Kevin Warsh is now the leading candidate to be the next Fed chair, a development that could signal a less aggressive path for interest rate cuts compared to his main rival.

Warsh’s odds in betting markets surged on Friday after President Donald Trump suggested he prefers to keep National Economic Council Director Kevin Hassett, previously seen as the top contender, in his current role. Speaking at a White House event, Trump praised Hassett's television performance, adding, "I actually want to keep you where you are if you want to know the truth."

Following the president's comments, Polymarket odds for Warsh winning the nomination jumped to 60%, while Hassett's chances fell to just 15%. This shift has significant implications for monetary policy, the economy, and the central bank's independence.

Former Federal Reserve Governor Kevin Warsh is now viewed as the leading candidate to be the next Fed chair.

Two Contenders, Two Visions for the Fed

The selection of the next Fed chair is critical. Current Chair Jerome Powell's term expires in May, and his successor will inherit control over the federal funds rate, which influences borrowing costs across the entire economy. Both Warsh and Hassett have publicly advocated for lower interest rates, but their approaches and allegiances appear to differ.

Kevin Hassett: The Aggressive Rate-Cutter

Hassett has often aligned with President Trump in calling for steep cuts to interest rates. This has led many analysts to view him as the candidate most likely to push the central bank to follow the White House's policy preferences.

"In our view, Hassett would likely bring the greatest risk of politicization at the Fed," wrote David Seif, chief economist at Nomura, in an October commentary. "Hassett is widely viewed as a Trump loyalist and has consistently supported the president as an advisor in both his first and second terms."

Kevin Warsh: A More Measured Approach?

Warsh, a lawyer and banker, has also supported rate cuts. "We can lower interest rates a lot," he stated on Fox News in October.

However, many economists believe he may be less "dovish"—or inclined toward rate cuts—than Hassett. "Although Warsh has argued for lower rates recently, we do not view him as structurally dovish," noted Matthew Luzzetti, chief economist at Deutsche Bank, in a December analysis. This suggests Warsh might take a more independent stance once in office.

Financial markets seem to agree. Treasury yields rose slightly on Friday as Warsh's odds improved, indicating that investors believe interest rates may remain higher under his leadership than under Hassett's.

The New Chair's High-Stakes Balancing Act

Whoever takes the helm at the Fed will face a challenging economic environment, provided they are confirmed by the Senate. The central bank's 12-person policy committee is currently divided on the best course of action.

The core dilemma is a slowing job market pulling against stubbornly high inflation. The weakening labor market calls for rate cuts to stimulate growth, while inflation running above the Fed's 2% annual target argues for keeping rates higher for longer.

Under Jerome Powell, the Fed has already cut rates by three-quarters of a point over its last three meetings—a pace slower than President Trump has demanded. With the Federal Open Market Committee (FOMC) widely expected to hold rates steady at its next meeting, whether more cuts are coming this year remains an open question.

Navigating Political Pressure and Fed Independence

The next chair won't just be managing the economy; they'll be defending the institution itself. President Trump's demands for rate cuts and his administration's criminal investigation into committee members have raised serious concerns about the central bank's independence from political influence.

Economists have long warned that if the public begins to doubt the Fed's commitment to controlling inflation, that belief could become a self-fulfilling prophecy. To counter this, the new leader may feel pressure to resist cutting rates simply to prove the Fed's credibility.

"Regardless of President Trump's choice, the market could look to test the next Fed chair's independence and the credibility of his commitment to achieving the inflation target," Lutezzi wrote. "These bona fides always need to be earned by an incoming chair."