The new Federal Reserve Chair has been appointed! Cryptocurrency still hasn't received its positive news after all.

Author: Zhou, ChainCatcher

On the evening of January 30th Beijing time, Donald Trump officially announced the nomination of former Federal Reserve Board member Kevin Warsh as the next Federal Reserve Chair, succeeding Jerome Powell whose term ends on May 15, 2026.

Trump previously stated in public events that his chosen candidate is well-known and highly respected in the financial industry, and should have been appointed to this position years ago.

This statement quickly focused market attention on Warsh, as he was among the final candidates in the 2017 selection process but narrowly lost out to Powell.

Hours before the announcement, Polymarket’s prediction market odds showed Warsh’s chances soaring above 95%, while BlackRock executive Rick Rieder’s probability plummeted from nearly 50% to 3%.

Since Warsh is known for his long-standing hawkish stance, this expectation rapidly boosted the dollar and U.S. Treasury yields, putting downward pressure on commodity prices, leading to a sharp decline in international gold and silver prices.

Spot gold plunged 8%, erasing $400 billion in market value, while silver dropped as much as 18%; the 30-year U.S. Treasury yield rose to 4.91%, the highest in over a week.

The crypto market also suffered a bloodbath, with Bitcoin falling over 6% in 24 hours, approaching $81,000 at its lowest, Ethereum dropping below $2,700, and the overall crypto market down 5.6%, with a market cap evaporating $160 billion.

Rate Cuts and Balance Sheet Reduction: Structural Hawk vs. Tactical Dovish?

This nomination occurred amid an extremely tense political environment within the Federal Reserve leadership. Current Chair Powell has been publicly criticized multiple times by Trump for high interest rates and is also under investigation by the Department of Justice regarding the costs of Fed headquarters renovations and audits.

According to publicly available information, Kevin Warsh’s professional background aligns closely with Trump’s economic vision. He has a legal background and served as a Federal Reserve Board member from 2006 to 2011, playing a key role in market communication during the global financial crisis.

Currently, Warsh holds multiple roles, including professor at Stanford University and partner at the Drukenmiller family office. His monetary policy stance is not simply dovish or hawkish but emphasizes the need for a thorough reform of the Federal Reserve’s system. He believes the outdated inflation framework should be abandoned in favor of a more transparent price stability target.

The most notable aspect is the logic of simultaneous rate cuts and balance sheet reduction.

In Warsh’s view, the main mistake of the Fed over the past decade was excessive expansion of its balance sheet, which he sees as a de facto subsidy to Wall Street. He advocates for a significant and rapid reduction of the current approximately $7 trillion balance sheet, using the withdrawal of market liquidity to offset inflationary pressures.

Warsh believes that as long as the balance sheet can be significantly shrunk, the Fed can safely lower nominal interest rates, thus satisfying Trump’s demands for low interest rates and affordable housing without triggering runaway inflation.

Additionally, Warsh recognizes the deflationary effects brought by technological advances (AI), considering productivity improvements as a realistic basis for substantial rate cuts.

Deutsche Bank analysts suggest that Warsh might adopt a strategy of simultaneous rate cuts and balance sheet reduction, lowering interest rates while tightening liquidity. However, this combination’s feasibility is uncertain in the short term, especially if regulatory reforms reduce banks’ reserve requirements. Historically, Warsh has a strong hawkish instinct, even during the 2008 crisis, when he was concerned about inflation risks despite the economy nearing deflation.

Some observers also worry that his dovish stance might be merely a political expedient, risking deception by Trump. If inflation rises, he could revert to the strict monetary discipline seen during the 2008 crisis.

Attitude Toward Crypto Assets Is Not Positive

The latest FOMC meeting, which kept interest rates unchanged, already disappointed markets, and Warsh’s appointment does not seem to ease crypto market anxiety.

Warsh’s attitude toward Bitcoin and cryptocurrencies is neutral to somewhat negative. While he regards Bitcoin as a sustainable store of value similar to gold, he does not see it as valueless like Powell does. However, he has strongly opposed private cryptocurrencies and advocates for the U.S. to launch a central bank digital currency (CBDC) to counter China’s digital yuan.

Markus Thielen, founder of 10x Research, pointed out that the market generally views Kevin Warsh regaining policy influence as a negative factor for Bitcoin, because he emphasizes monetary discipline, higher real interest rates, and tightening liquidity. His policy framework tends to see cryptocurrencies as “speculative assets in a loose monetary environment,” rather than tools to hedge against currency devaluation. Higher real interest rates mean increased real borrowing costs after inflation, which typically suppresses demand for risk assets including Bitcoin.

Furthermore, many analysts believe that his hawkish stance and underestimation of deflation risks could exacerbate economic downturns, leading to higher unemployment, slower recovery, and greater deflation risks if such policies are continued.

Damian Boy, a portfolio strategist at Wilson Asset Management, said the market is reacting by pondering what the world would look like if the Fed’s balance sheet shrinks. Once discussions of withdrawal begin, assets like gold, cryptocurrencies, and bonds will be sold off.

Overall, if Warsh is ultimately confirmed to lead the Fed, he will face unprecedented challenges: how to meet Trump’s demand for the lowest global interest rates while maintaining the Fed’s independence as the world’s monetary lighthouse. Warsh has long advocated a return to “rules-based” monetary policy, and whether this can be compatible with Trump’s “intuition-driven” approach will be one of the global market’s suspense points in 2026.

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