Kevin Warsh was confirmed as chairman of the U.S. Federal Reserve by a 54-45 Senate vote — one of the narrowest margins in recent memory — setting the stage for a sweeping overhaul of the world's most watched central bank.
In an exclusive interview with The Storm Media, former Executive Yuan Deputy Premier Shih Jun-ji ( 施俊吉) called the transition far more than a change in leadership. What Warsh is pursuing, Shih argued, is a deliberate effort to "dim the Fed's brightness" — pulling the central bank back from its outsized role in everyday capital markets and returning it to Bagehot's Dictum: lend freely in a crisis, stay out of normal times.
How the Fed's balance sheet ballooned — and why Warsh wants to shrink it
The Fed's balance sheet tells the story of an institution that grew far beyond its original boundaries. From $0.9 trillion — roughly 6% of GDP — before the 2008 financial crisis, its assets expanded to $7.1 trillion at the height of the COVID-19 pandemic. They currently stand at $6.7 trillion, or about 21% of GDP.
Warsh, who outlined his agenda at an April 21 confirmation hearing, wants to reverse that trajectory. His priorities include overhauling how the Fed communicates, adopting new inflation measures, relying more on interest rates than balance-sheet tools, and refocusing the institution strictly on price stability and full employment.
Shih described a March 2026 Federal Reserve staff paper — A User's Guide to Reducing the Federal Reserve's Balance Sheet, co-authored by Governor Stephen Miran — as a systematic "user's guide" offering 15 concrete policy options for reducing the balance sheet. Rather than selling bonds outright, the approach targets bank behavior: adjusting liquidity-coverage ratios, interest on excess reserves, and the treatment of short-term Treasuries. Done carefully, the paper estimates the Fed could shed between $1.2 trillion and $2.1 trillion without triggering the repo-market stress seen in 2019.
The underlying rationale, Shih explained, rests on three pillars: rejecting the normalization of quantitative easing as disguised fiscal policy; preventing the Fed from becoming a structural market buyer that distorts wealth distribution; and restoring clear boundaries between monetary policy and credit allocation. He noted that nearly half of Americans hold no financial assets and have never benefited from balance-sheet expansion.
Why Warsh wants the Fed to stop talking so much
Warsh's communications agenda is equally ambitious. He has criticized Fed officials for "talking too much," argued that "truth matters more than repetition," and proposed scrapping the quarterly dot plot while pulling back on forward guidance — all moves that Shih says align with the "dim the brightness" philosophy. Excessive signaling, the argument goes, can constrain policy rather than clarify it.
Not everyone agrees. Former Cleveland Fed President Loretta Mester has warned that communication is far from trivial for markets, the public, and Congress. Economist Derek Tang pointed to the 2022 tightening cycle, where clear guidance helped markets front-load rate expectations and avoided larger spikes. A Brookings Institution survey released this month showed most economists still favor retaining post-meeting press conferences.
There are also structural limits to any reset: the 12 regional Federal Reserve presidents operate independently, and their public remarks cannot easily be coordinated from the top.
Warsh has also called for replacing the core PCE inflation measure with trimmed-mean or median indices to filter out extreme data swings, and for the Fed to exit the Network for Greening the Financial System, staying within its statutory mandate.
Powell remains on the board — the first time in 80 years a former chair has stayed
Jerome Powell stepped down as chair on May 15 but will remain on the Federal Reserve Board of Governors — the first such arrangement in nearly 80 years. The last parallel came in 1948, when Marriner Eccles stayed on after leaving the chair and clashed with President Harry Truman over interest rates, a confrontation that helped enshrine the principle of Fed independence.
As Chair Jerome H. Powell's term as chair concludes, and with the swearing in of Kevin M. Warsh as his successor pending, the Federal Reserve Board on Friday named Powell as chair pro tempore. This temporary action to name the incumbent as chair pro tempore is consistent with…
— Federal Reserve (@federalreserve) May 15, 2026
Powell has said he intends to protect monetary policy from political pressure while an inquiry into the Fed's headquarters renovation concludes. The June FOMC meeting will mark the first time a sitting and a former chair serve simultaneously. Powell has pledged to remain low-key: "There is only one Fed chair," he said.
Shih sees the arrangement as reinforcing Warsh's broader project — restoring the Fed to a professional, neutral role rather than a political instrument.
What a steeper yield curve and stronger dollar mean for global investors
Shih anticipates a deliberately steeper yield curve: short-term rates ease amid ample liquidity, while longer-term rates rise as more Treasuries and mortgage-backed securities reach the market. U.S. banks should benefit from wider net interest margins. Long-term bond investors and mortgage borrowers face headwinds. A reduced dollar supply would, over time, support the greenback.
How Asia's capital flows could shift as U.S. yields rise
The policy shift in Washington reaches Asia's financial markets quickly. Rising U.S. long-term yields and a stronger dollar will widen interest-rate differentials that already favor American assets. Life-insurance companies and pension funds across the region — mandated to seek stable long-term returns — are likely to accelerate capital outflows into U.S. fixed-income markets.
Persistent yen carry trades will continue channeling yield-seeking capital toward the United States despite occasional Bank of Japan interventions. Shih warned of heightened capital-account pressure, greater equity-market volatility, and rising risks for insurers across the Asia-Pacific.
"There will be no liquidity crunch, so foreign capital will not abruptly flee. But the structural pull is unmistakable."
For policymakers in the region, Shih argued, this is not an isolated event but the opening move of a global capital reallocation. Governments and central banks must respond proactively: strengthen domestic investment appeal, diversify foreign-exchange reserves, and pursue bilateral dialogue to protect financial stability.
As the Fed deliberately dims its brightness, those who fail to adapt may find sustained capital outflows and widening interest-rate spreads testing their economies for years to come.
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Original Article in Chinese
