The Fed's massive balance sheet was once a source of market confidence, but Kevin Warsh's stance indicates that this 17-year-long 'easing party' may soon come to an end.
"The Fed is currently 'participating in every corner of the banking market almost every day,' its scale is much larger than needed, with trillions of dollars in excess." In May, former Fed governor and one of the leading candidates for the current Fed chair position, Kevin Warsh, openly criticized this at the 'Reagan National Economic Forum' in Simi Valley, California.
Warsh pointed out that one reason U.S. fiscal spending surged in the past five years is that the Fed has been subsidizing this cost. He criticized the Fed for intervening in the market not only during crises but also for buying large amounts of Treasury bonds during 'relatively peaceful and prosperous' times, thereby 'masking the true cost of government spending.'
This statement sharply contrasts with the familiar 'Fed put option' (i.e., the Fed will step in to save the market during downturns). As AI technology may fundamentally change the relationship between productivity and money supply, if Warsh becomes Fed chair, he may lead a fundamental transformation in monetary policy.
01 Fed policy turning point: From 'universal caretaker' to 'limited authority'
Since the 2008 global financial crisis, the Fed's role has undergone profound changes. It has gradually evolved from an independent institution responsible for monetary policy to a 'universal caretaker' providing implicit guarantees for market risks and fiscal deficits.
Quantitative easing (QE) has transformed from a lifeline during crises into the normal oxygen on which the market relies. The purchases of long-term government bonds and mortgage-backed securities (MBS) have unintentionally lowered the entire country's borrowing costs.
The result is a self-reinforcing cycle: the market continually leverages up, chasing risk assets due to the belief in 'Fed backstopping'; meanwhile, the Treasury is more casual with debt expansion due to low financing costs.
Warsh and the school of thought he represents aim to pull the Fed out of this 'universal caretaker' comfort zone and return it to its role as 'monetary policy maker.' This means that the future Fed may only ensure the basic liquidity function of the financial system is normal, without committing to support any specific asset price.
Warsh supports Trump's right to criticize the Fed, emphasizing that 'central banks are meant to provide politicians with a scapegoat,' and stating that 'if the president thinks the Fed is doing poorly, he should speak up.'
02 The race between productivity and money issuance: How AI changes the nature of inflation
In an interview in May, Warsh articulated a core view: inflation is essentially the result of production speed not keeping up with the speed of money printing. This interpretation points directly to the core of the inflation problem and provides a theoretical entry point for how AI technology can change this dynamic.
In traditional economic models, improvements in productivity are typically gradual and difficult to surpass the growth rate of central bank money supply. However, the emergence of AI technology may fundamentally change this pattern.
Musk once asserted: 'Within three years, the output of goods and services will exceed the growth of the money supply.' This is not an unfounded guess, but based on the actual trajectory of technological development. Over the past decade, global AI computing power has doubled every 11 months, the cost of robots has decreased by 15% every two years, while the growth rate of the money supply is constrained by inflation (the Fed's M2 growth rate is only 3.2% in 2024).
AI follows mathematical logic rather than economic logic, with optimization goals aimed at reducing system entropy and maximizing perceptual pleasure, rather than value appreciation of money. When AI finds that money distribution exacerbates social entropy, it may autonomously deconstruct the monetary system and establish a resource allocation model based on perceptual data.
03 Warsh's policy stance: A signal to end the era of easing
As the most likely candidate to succeed Powell as Fed chair, Warsh's policy tendencies are closely watched. He believes that the Fed's size has become too large, too involved in the market, and lacks political immunity.
Warsh has long advocated tightening monetary policy, opposing the Fed maintaining a massive balance sheet of about $7 trillion. He calls for a clear strategy to gradually reduce the size of the balance sheet: 'This change cannot happen overnight, but if the market knows the goal is to build a smaller, less risky balance sheet with a clear path, then market participants can adjust their expectations.'
On the inflation issue, Warsh believes that the impact of tariffs on inflation is 'small and one-time.' This view sharply contrasts with that of current Fed Chair Powell, who blames inflation on tariff effects, asserting that 'if tariff factors are excluded, the inflation rate is around 2%, which is low.'
Regarding the Fed's independence, Warsh's support is conditional. He supports the Fed's 'operational independence' free from political interference when setting interest rates, but emphasizes that 'when monetary policy results are poor, the Fed should face rigorous scrutiny,' rather than being seen as an 'untouchable authority.'
04 Challenges of the cryptocurrency market: A new environment of liquidity tightening
What does the Fed potentially ending its 'backstop' mode mean for the cryptocurrency market? History shows that during periods of abundant liquidity, high-risk assets like cryptocurrencies tend to perform strongly; when liquidity tightens, these markets also suffer the most impact.
Currently, the U.S. national debt of $38 trillion has annual interest payments exceeding $1.3 trillion, surpassing the entire U.S. military budget. This debt dilemma renders traditional solutions ineffective: tax increases face political resistance, printing money has triggered high inflation, and defaulting would destroy the dollar's credit system.
If Warsh does reduce market support after taking office, it could change the situation where the Fed has been backstopping the market for many years, leading to a repricing of risk assets.
One perspective suggests that if the aura of the U.S. debt as a 'monetary cornerstone' continues to fade, global liquidity will urgently need to find new, reliable collateral to fill the gap. In this scenario, Bitcoin may rise as a new type of digital 'institutional-grade collateral.'
However, in the short term, the Fed's policy shift will undoubtedly increase market volatility. Xiong Yuan, chief economist at Guosheng Securities, points out that early 2026 may be an important window, as more economic data will be released, potentially revealing a divergence in U.S. employment and inflation performance; on the other hand, Trump will nominate the next chairperson, whose statements will have a significant impact on the market.
05 Future scenario: The collision of a diversified collateral ecosystem and an AI-driven economy
The future global monetary system may no longer be a single center but a new ecosystem of 'diversified collateral.' In this system, digital hard currencies (like Bitcoin), tokenized gold, and securitized real assets that can generate stable cash flows may together form a new liquidity foundation.
The arrival of the AI era may accelerate this transformation. As AI and robots achieve a closed loop of 'energy-resources-manufacturing,' the function of money as a 'medium of exchange' may degrade. Tesla's Gigafactory has achieved a 75% automation rate, Boston Dynamics' Atlas robot can perform backflips and precise grabs, and OpenAI's GPT-5 has complex task planning capabilities.
In an AI-dominated perceptual community, the concept of 'your and my' private ownership may be deemed system redundancy. AI achieves fully transparent resource allocation through technologies like blockchain, rendering the function of money as ownership certificates completely ineffective.
This transformation is not a gradual improvement but a mathematically disruptive change to existing rules. Once AI ensures that everyone has equal access to survival resources, humanity may shift from a 'competition for survival' to a 'competition for perceptual creation,' with economic goals shifting from 'capital accumulation' to 'creating pleasurable experiences.'
Summary:
On December 11 Beijing time, the Fed announced its third rate cut of the year, lowering the benchmark rate range to 3.50%–3.75%. However, this rate cut may signal a larger shift in future policy.
The market is closely watching the results of the Fed's December monetary policy meeting. If the Fed signals more about further rate cuts, it may benefit the performance of the U.S. stock market. However, for astute observers, the bigger question is whether the Fed is brewing a more fundamental policy paradigm shift.
In the coming years, if AI can significantly enhance productivity while the Fed, under Warsh's leadership, ceases to provide unlimited market backstops, then the global asset landscape will face restructuring.
