Financial markets may misjudge the speed at which U.S. interest rates would be lowered if Kevin Warsh becomes the next chairman of the Federal Reserve. A new analysis suggests rapid and sharp rate cuts, a scenario likely to weaken the dollar and revive risk assets, notably bitcoin.
In brief
- Robin Brooks believes markets are downplaying the possible speed and extent of easing under Warsh.
- Bitcoin and risk assets fell as markets anticipated a tighter Fed, perhaps wrongly.
- Brooks forecasts up to 100 basis points of declines by October, well beyond the 40 points currently anticipated.
- Political pressure and productivity gains could weaken the dollar and encourage a rebound in cryptos.
A more marked relaxation than expected?
Fears of an ultra-hawkish Federal Reserve under Warsh's leadership would be overblown, according to Robin Brooks, a senior economist at the Brookings Institution and a leading expert on global fiscal risks. His analysis contradicts the current positioning of the markets, based on a certain skepticism about the pace of possible monetary easing.
Brooks said Tuesday that Warsh could quickly reorient monetary policy once he takes office. It plans four successive rate cuts, in June, July, September and October, for a total of 100 basis points. A much more aggressive trajectory than the 40 basis points of easing currently integrated by the markets.
This could amount to a reset of monetary policy, aiming to recognize a lower neutral rate. This approach would go well beyond the approximately 40 basis points of declines currently anticipated by the markets, and would pave the way for further weakening of the dollar.
Robin Brooks
According to Robin Brooks, a lower neutral interest rate would provide to Fed officials room for maneuver to make more aggressive cuts, without reviving inflation. Such a move would likely put downward pressure on the dollar and improve liquidity conditions globally. Historically, periods of greenback weakness during easing cycles have supported cryptocurrency prices.
Brooks’ background reinforces the credibility of his analysis. For more than a year, he has been warning about growing fiscal stress in Japan, a concern now visible through the surge in government bond yields. This experience fuels his conviction that the markets risk once again misinterpreting certain political signals.
If its forecasts are confirmed, the Fed's key rate could fall to a range of 2.5% to 2.75% by the midterm elections in November, compared to 3.5% to 3.75% currently. Jerome Powell's term ends in May, and the Fed suspended further action last month, after cutting rates by 75 basis points in three meetings.
Risky assets decline in the face of a shift perceived as stricter
Recent market movements show that investors are positioning themselves for a much more restrictive monetary trajectory. Since rumors emerged around Warsh's possible appointment, bitcoin has fallen from around $84,500 to less than $75,000. Gold and silver fell, while the dollar index rose, illustrating a sharp decline in risk appetite.
Brooks believes this reaction ignores several political and economic factors that could influence Warsh's decisions:
- Donald Trump has publicly advocated for rates near 1% and blamed slowing growth on high borrowing costs.
- An early clash with the White House could damage Warsh's credibility.
- A faster fall in rates would help support ongoing disinflation and less dynamic demand.
- If easing accelerates beyond expectations, markets will have to quickly review their position.
Concerns also persist about Warsh's past. As governor of the Fed during the 2008-2009 crisis, he was particularly cautious about the risk of inflation, much more than his colleagues. But according to Brooks, the current context is very different: inflation is falling, and productivity gains offer space for looser policy.
Artificial intelligence is also part of this perspective. Warsh argued that increased productivity helps contain inflation while supporting wages. In an article published in November in the Wall Street Journal, he asserted that a one-point increase in annual productivity rate could double living standards in a generation.
Taken together, these elements support the scenario of rapid monetary easing, without giving up price controls. For cryptocurrency markets, the combination of a weaker dollar and lower interest rates could pave the way for a new bullish phase.
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