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Original | Odaily Planet Daily Ethan
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As the year draws to a close, the suspense over who will wield the scepter of the Federal Reserve Chair, the ‘master valve’ of global liquidity, has become the most anticipated year-end cliffhanger.
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Months ago, when the benchmark interest rate ended its long pause and saw its first cut, the market was once convinced that Christopher Waller was the chosen one (Recommended reading\”The Academic’s Comeback: Small-Town Professor Waller Becomes Hottest Contender for Fed Chair\”). In October, the winds shifted, and Kevin Hassett surged ahead, with betting odds once nearing 85%. He is seen as the ‘mouthpiece of the White House’; if he takes office, policy might completely follow Trump’s will, even being jokingly called a ‘human money printer’.
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However, today we will not discuss the ‘top contender’ with higher odds, but instead focus on the ‘second in line’ with the greatest potential for change—Kevin Warsh.
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If Hassett represents the market’s ‘greed expectation’ (lower rates, more liquidity), then Warsh represents the market’s ‘fear and awe’ (harder money, stricter rules). Why is the market re-examining this outsider once hailed as the ‘Wall Street golden boy’? If he were to truly lead the Fed, what seismic shifts would occur in the underlying logic of the crypto market? (Odaily Note: The core viewpoints of this article are based on inferences and summaries from Warsh’s recent speeches and interviews.)
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Warsh’s Evolution: From Wall Street Golden Boy to Fed Outsider
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Kevin Warsh does not have a Ph.D. in macroeconomics, and his career did not start in an ivory tower but in Morgan Stanley’s M&A department. This experience gave him a mindset completely different from Bernanke or Yellen: in the eyes of academics, a crisis is just a data anomaly on a model; but in Warsh’s eyes, a crisis is the moment a counterparty defaults, the life-or-death instant when liquidity goes from ‘present’ to ‘absent’.
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In 2006, when the 35-year-old Warsh was appointed as a Federal Reserve Governor, many questioned his lack of seniority. But history is ironic; it was precisely this ‘Wall Street insider’ practical experience that made him an indispensable player in the subsequent financial storm. During the darkest hours of 2008, Warsh’s role had already transcended that of a regulator; he became the sole ‘translator’ between the Fed and Wall Street.
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Excerpt from Warsh’s interview at Stanford University’s Hoover Institution
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On one hand, he had to translate Bear Stearns’ toxic assets that went to zero overnight into language that academic officials could understand; on the other hand, he had to translate the Fed’s obscure rescue intentions to the panicked market. He personally experienced the frantic weekend negotiations before Lehman’s collapse. This close-quarters combat gave him a physiological sensitivity to ‘liquidity’. He saw through the essence of quantitative easing (QE): central banks must indeed act as the ‘lender of last resort’ during a crisis, but this is essentially a transaction that mortgages future credit to buy survival time in the present. He even pointedly noted that the long-term transfusion after the crisis was actually a ‘reverse Robin Hood’, artificially inflating asset prices to rob the poor to aid the rich. This not only distorts market signals but also sows the seeds for a bigger crisis.
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It was precisely this keen sense of the system’s fragility that became his core bargaining chip when Trump was selecting candidates for the new Fed Chair. On Trump’s list, Warsh and another hot contender, Kevin Hassett, formed a stark contrast. This contest was jokingly called the ‘Battle of the Two Kevins’ by the media.
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Fed Chair Candidates: Hassett VS Warsh, Image source Odaily Original
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Hassett is a typical ‘growth-first’ advocate. His logic is simple and direct: as long as the economy is growing, low interest rates are justified. The market generally believes that if Hassett takes office, he would likely cater to Trump’s desire for low rates, even starting to cut rates before inflation is fully under control. This also explains why long-term bond yields surged whenever Hassett’s odds increased, as the market feared runaway inflation.
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In contrast, Warsh’s logic is far more complex. It’s hard to simply label him as a ‘hawk’ or a ‘dove’. Although he also advocates for rate cuts, his reasoning is completely different. Warsh believes that current inflationary pressures are not due to excessive buying but to supply constraints and the massive monetary over-issuance of the past decade. The Fed’s bloated balance sheet is actually ‘crowding out’ private credit and distorting capital allocation.
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Therefore, the prescription Warsh offers is an extremely experimental combination: aggressive quantitative tightening (QT) coupled with moderate rate cuts. His intention is clear: control inflation expectations by reducing the money supply, restoring the credibility of the dollar’s purchasing power—essentially draining some of the liquidity. Simultaneously, lower nominal interest rates to ease corporate financing costs. This is a hardcore attempt to get the economy moving again without resorting to monetary easing.
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The Butterfly Effect on the Crypto Market: Liquidity, Regulation, and Hawkish Underpinnings
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If Powell is like a ‘gentle stepfather’ for the crypto market, cautiously trying not to wake the children, then Warsh is more like a ‘strict headmaster of a boarding school’ with a ruler in hand. The storm stirred by this butterfly’s wings might be more violent than we anticipate.
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This ‘strictness’ first manifests in his obsession with liquidity. The crypto market, especially Bitcoin, has been, to some extent, a derivative of the global dollar glut over the past decade. Warsh’s policy core is a ‘strategic reset’, returning to the sound monetary principles of the Volcker era. His aforementioned ‘aggressive QT’ is both a short-term nightmare and a long-term litmus test for Bitcoin.
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Warsh has explicitly stated: \”If you want to lower interest rates, you must first stop the printing press.\” For risk assets accustomed to the ‘Fed put’, this means the disappearance of the safety net. If he takes office and firmly implements his ‘strategic reset’, leading monetary policy back to more prudent principles, the tightening of global liquidity will be the first domino to fall. As a ‘frontier risk asset’ highly sensitive to liquidity, the cryptocurrency market will undoubtedly face valuation pressure in the short term.
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Kevin Warsh discusses Fed Chair Jerome Powell’s interest rate strategy on the ‘Kudlow’ program, source Fox Business
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More importantly, if he truly achieves ‘inflation-free growth’ through supply-side reforms, keeping real yields positive in the long run, then holding fiat currency and government bonds will become profitable. This is completely different from the negative interest rate era of 2020, where ‘everything went up, only cash was trash.’ Bitcoin’s appeal as a ‘zero-yield asset’ may face a severe test.
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But there are always two sides to the coin. Warsh is someone who is extremely superstitious about ‘market discipline’. He would never rush to rescue the market like Powell did when the stock market fell 10%. This ‘no-bottom’ market environment might instead give Bitcoin a chance to prove its worth: when the traditional financial system develops credit fissures due to deleveraging (like the Silicon Valley Bank crisis), can Bitcoin break free from the gravitational pull of US stocks and truly become a Noah’s Ark for safe-haven capital? This is the ultimate test Warsh poses for the crypto market.
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Behind this test lies Warsh’s unique definition of cryptocurrency. He left a famous quote in The Wall Street Journal: \”Cryptocurrency is a misnomer. It’s not mysterious, and it’s not money. It’s software.\”
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