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Here’s the reason why Fed candidate Kevin Warsh is perceived as pessimistic regarding bitcoin.
BTC plunged further to almost $81,000 late Thursday as Warsh’s chances surged in betting markets.
BTC drops as Kevin Warsh emerges as contender for the Fed job. (Tasos Katopodis/Getty Images for Semafor)
What to know:
- President Donald Trump is anticipated to soon announce a replacement for Federal Reserve Chair Jerome Powell, with former Fed Governor Kevin Warsh rising as a prominent candidate.
- Warsh’s history of emphasizing inflation risks during the global financial crisis and his preference for monetary discipline has unsettled analysts and market participants.
- BTC declined further to nearly $81,000 late Thursday as Warsh’s odds increased in gambling markets.
On Thursday, President Donald Trump indicated he would reveal his choice for the U.S. Federal Reserve chair to succeed Jerome Powell after Powell’s term concludes in May.
While nothing is yet confirmed, reports indicate the Trump administration is preparing to nominate Kevin Warsh, who was a member of the Federal Reserve Board of Governors from 2006 to 2011.
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Warsh has at times commended cryptocurrencies. Nevertheless, bitcoin plummeted late Thursday to around $81,000 lows as his chances surged on betting platforms, with some analysts now identifying him as a bearish influence on the asset.
"Markets generally see a resurgence of Warsh’s impact as negative for Bitcoin, as his focus on monetary discipline, increased real rates, and decreased liquidity positions crypto not as a safeguard against devaluation but as a speculative bubble that diminishes when easy money is withdrawn," Markus Thielen, founder of 10x Research, stated to CoinDesk.
Higher real interest rates indicate that the true cost of borrowing money, after considering inflation, is high. It can be understood as the “real” interest rate that impacts your finances more significantly. When real rates rise, companies and investors typically reduce their exposure to high-risk investments like bitcoin.
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Warsh’s history adds fuel to the fire. Throughout the global financial crisis (GFC) from December 2007 to June 2009, Warsh consistently pointed out inflation risks even while the global economy was on the verge of a significant deflation.
For example, in September 2008, the month Lehman Brothers fell, Warsh remarked, "I am still not prepared to abandon my concerns regarding inflation."
Seven months later, when the Fed’s preferred inflation metric stood at 0.8% and the unemployment rate was at 9%, he stated, "I remain more concerned about upward inflation risks than downward risks."
Over the years, numerous observers have contended that Warsh’s hawkish stance and his failure to recognize deflation risks worsened the crisis.
"From this viewpoint, his strategy would likely have led to elevated unemployment, slower recoveries, and greater deflation risks during the 2010s," Thielen noted.
All these factors render a potential Warsh appointment ironic, as the former Fed governor’s aggressive record starkly contrasts with Trump’s reflationary, pro-risk asset strategy. Trump has consistently criticized Powell, often resorting to personal attacks for maintaining elevated rates and harming the economy. The President has emphasized the necessity for swift rate cuts, advocating for interest rates to drop to as low as 1% from the current range of 3.5%-3.7%.
Therefore, several analysts argue that Warsh would be an unsuitable choice for the Fed that is anticipated to align with Trump’s agenda.
"Kevin Warsh has been a monetary policy hawk throughout his career and notably, during a period when labor markets collapsed. His current dovishness is born out of convenience. The President risks being misled," Renaissance Macro Research commented on X.
"I reviewed the FOMC transcripts during the GFC. His statements alarmed me," Bloomberg’s Chief U.S. Economist Ana Wong remarked.
Fortunately, even if appointed as Fed chair, Warsh cannot set rates unilaterally, as the Board of Governors makes collective decisions, which mitigates any individual influence. It remains to be seen whether Trump will proceed with Warsh.
Until then, his hawkish past may continue to unsettle risk assets, strengthening the dollar in the meantime.
