Who Will Shape Fed Policy in Trump's Second Term? The Warsh-Hassett Race and What It Means for Markets

The Plot Twist Nobody Saw Coming

Just when Wall Street thought they had figured out Trump’s next move, the script flipped. Two weeks ago, Kevin Hassett seemed like the clear frontrunner for the Federal Reserve chairmanship—his odds hovered above 80% on prediction markets. But a White House meeting between Trump and former Fed Governor Kevin Warsh last week completely rewrote the narrative.

On December 16, Polymarket data showed something remarkable: Warsh’s odds had climbed to 45%, officially surpassing Hassett’s 42%. For crypto investors and equity traders, this shift represents far more than a personnel shuffle—it signals a fundamental change in the direction of U.S. monetary policy for the next four years. Understanding what’s at stake requires looking beyond the headlines to see what each candidate represents.

Why Warsh Suddenly Entered Trump’s Sightline

Warsh wasn’t unknown to Trump. During the first administration, he was actually the runner-up for Fed chair—a position that ultimately went to Jerome Powell in 2017. The story of how Powell, despite Trump’s later criticism of him, won out over Warsh is itself revealing: then-Treasury Secretary Steven Mnuchin lobbied hard for Powell at the time.

Fast forward to 2025, and it appears Trump may be correcting that decision. Several factors explain Warsh’s recent surge:

The Personal Network Factor. Unlike Hassett, who comes across as a staff functionary, Warsh has deep personal ties to Trump’s inner circle. His father-in-law is Ronald Lauder, a billionaire businessman and longtime Trump confidant. Additionally, Warsh and current Treasury Secretary Mnuchin are old friends—a connection that matters in Trump’s world. These relationships gave Warsh direct access to the transition team and positioned him as “one of Trump’s own.”

Wall Street’s Endorsement. JPMorgan CEO Jamie Dimon recently signaled clear support for Warsh at a private gathering of major asset managers. According to Financial Times sources, Dimon specifically warned that Hassett might pursue aggressive rate cuts to appease Trump—a policy path that could reignite inflation. This institutional backing from financial elite carries weight.

The Timing and the Misstep. Hassett appears to have made a strategic error. Just days before Trump’s meeting with Warsh, Hassett gave several public statements seemingly designed to reassure bond markets about his “independence.” When asked whether Trump’s views would influence Fed decisions, Hassett responded: “No, his opinions will carry no weight…only when his views are reasonable and supported by data do they have reference significance.” He added that if inflation rose to 4%, rate cuts would be off the table.

This textbook central banker posturing may have calmed bond traders, but it likely irritated Trump. After these remarks surfaced publicly, the Warsh meeting began appearing in news cycles—a clear signal that Trump was reconsidering his options.

Two Very Different Visions for Monetary Policy

Here’s where the market should pay close attention. Hassett and Warsh aren’t just different personalities—they represent two fundamentally different approaches to the Fed’s role.

The Hassett Path: Liquidity First. If Hassett takes over, expect the Fed to function largely as a cheerleader for equity markets. The White House could exert considerable influence over rate decisions. In the short term, this would likely send stocks—especially the Nasdaq—and Bitcoin surging. The cost? Long-term inflation risks and further erosion of dollar credibility globally.

The Warsh Path: Structural Reform. Warsh has spent fifteen years as one of QE’s harshest critics. He resigned from the Fed in 2010 specifically to protest quantitative easing. His core argument: “If we are quieter on the money printing machine, our interest rates can actually be lower.”

This means Warsh wants to reduce money supply through aggressive balance sheet normalization (quantitative tightening, or QT) while coordinating modest rate cuts. It’s a high-wire act—attempting to lower inflation expectations without crushing economic growth. According to Deutsche Bank analysis, a Warsh-led Fed would likely combine rate cuts with aggressive balance sheet reduction, a unique policy mix we haven’t seen before.

Unlike Powell, who attempted fine-tuning the economy, Warsh advocates for Fed restraint. He’s criticized the institution’s “mission creep” into areas like climate policy and diversity initiatives, arguing the Fed should stick to its core mission: maintaining price stability and defending the currency’s value.

The Crypto Wild Card

For those invested in digital assets, Warsh presents a paradox. In the short term, his liquidity-tightening approach would likely pressure crypto prices—he views unlimited monetary expansion as destructive rather than beneficial. But here’s the interesting part: Warsh is one of the few high-ranking officials who has actually invested in crypto projects (including Basis and Bitwise). More importantly, he’s an evangelist for deregulation and free markets, and he’s optimistic about AI-driven productivity gains.

Warsh essentially believes the economy can grow faster than the market currently expects, creating room for financial assets to rise naturally rather than through monetary stimulus. This “de-bubbling” scenario could ultimately be better for crypto’s long-term trajectory than a liquidity-driven rally that ends in tears.

The Trade Policy Wildcard

That said, Warsh isn’t perfectly aligned with Trump. His biggest point of disagreement: tariffs. Warsh is a committed free-trade advocate and has publicly warned that Trump’s tariff plans could lead to “economic isolationism.” Though he recently stated he’d support rate cuts even if tariffs rise, this tension remains. How Warsh navigates between maintaining dollar credibility and accommodating Trump’s tariff ambitions will define his tenure.

The Bottom Line: Trump Is Now the Director

Regardless of who wins this “Kevin showdown,” one fact is certain: Trump’s comeback has fundamentally shifted power dynamics. In 2020, Trump could only criticize Powell on Twitter from the sidelines. In 2025, with an overwhelming electoral mandate, he won’t be a mere observer anymore.

Whether Hassett or Warsh ultimately takes the helm may determine the plot’s direction, but Trump has made clear that he intends to be the one writing the script. The market would be wise to prepare for a Fed chair who sees the relationship with the White House very differently than Powell did.