Kevin Warsh Has an Almost Impossible Job. Here’s Why It Matters for Your Portfolio.
Kevin Warsh is about to become the next chair of the Federal Reserve, and I want to be honest with you: I don’t envy him one bit.
As chair, Warsh will lead the Federal Open Market Committee—12 voting members in total, made up of the seven Board of Governors, the president of the New York Fed (a permanent voter), and four regional Federal Reserve Bank presidents who rotate in on one-year terms. Together, they carry the weight of three congressional mandates: price stability, full employment, and keeping long-term interest rates at a moderate level (the oft forgotten third mandate from Congress since 1977).
That third one matters enormously right now. Compared to what he’s walking into, some of Kevin’s predecessors had it easy. Managing this economy in 2026 is a little like trying to nail Jello to a wall. Let’s all wish him the best of luck, for our sake.
This Isn’t Your Typical Inflation Story
Most of the time, the Fed keeps its eyes on consumer demand. When people spend too much, prices rise, and the Fed raises rates to cool things off. Simple enough in theory.
But what we’re dealing with now is a supply shock, and those are much harder to manage with interest rate policy. We saw this play out just a few years ago when pandemic-era supply chain breakdowns sent inflation spiraling. China’s zero-tolerance COVID policies contributed to a massive, policy-driven disruption that helped push the CPI-U (the Consumer Price Index for Urban Consumers) to a 9.1% annual rate in June 2022. At that point, the Fed had stayed committed to low short-term rates for far too long, and it became one of the bigger policy failures in recent memory.
Now, in early 2026, commodity prices are rising again across the board, with oil and refined products leading the way. The Producer Price Index climbed 1.4% in April, bringing its trailing twelve-month reading to 6.0% through April 2026. For context, the full-year 2022 PPI came in at 6.2%. We’re almost there. So the question a lot of people are asking, and that I’m taking seriously, is if we’re going to see retail inflation measures like the CPI-U jump to 9% again?
What BIP Did in 2022—and What We’re Doing Now
Source: This chart from BIP Wealth’s January 2023 Annual Market Report shows the Bloomberg U.S. Aggregate Bond Index’s historic decline in 2022.
When the last inflation surge hit, BIP Wealth was proactive in lowering the risks of rising rates in client portfolios. We pivoted much of our fixed income exposure to mimic the returns of the 3-month Treasury Bill Index rather than holding longer-duration bonds. The Bloomberg U.S. Aggregate Bond Index fell 13.01% in 2022, its worst annual performance ever. Our clients were protected from the brunt of that.
We are running the same play today. We’ve already reduced interest rate exposure in client portfolios, and we’re also taking profits from the equity run-up. Maybe the AI-driven boom can continue despite these macro headwinds, but we’re not counting on it.
The Fed’s Balance Sheet Problem
There’s another piece of this story worth mentioning: the Fed’s balance sheet.
Source: Federal Reserve Bank of St. Louis (FRED). The chart shows the balance sheet decline slowing in 2025 and now beginning to reverse upward.
In recent months, the Fed halted its so-called “quantitative tightening”—the gradual reduction of the massive bond portfolio it built up post-2008 and again post-pandemic. Not only did it stop selling, it has started buying Treasury bonds in the open market again. The effect of that is to suppress long-term interest rates, since the Fed is willing to accept whatever rate is offered. It also helps the U.S. Treasury to finance the annual budget deficit more cheaply at lower rates.
But here’s the catch: expanding the balance sheet means expanding the money supply. And more money chasing the same amount of goods leads to one thing: inflation! This is precisely why Warsh has stated publicly, for years, that he wants to shrink the Fed’s balance sheet. Whether he’ll actually be able to do that is the big question.
The Impossible Dilemma
So here’s where Kevin Warsh finds himself, and why this matters to you.
If he lowers short-term interest rates—which the White House favors, and which many believe he was selected partly to deliver—he risks pouring fuel on an inflationary fire that’s already burning hotter than most people realize. Warsh declared his independence during his Congressional confirmation hearings, but if he follows the path Powell took in 2021, we’ll likely see prices accelerate at the worst possible time.
If he shrinks the Fed’s balance sheet, as he has long advocated, be prepared for long-term interest rates to move meaningfully higher. The 30-year Treasury yield has already been flirting with 5% for weeks. A move toward 6% or higher would push mortgage rates up sharply, potentially crater the housing market, and significantly increase the cost of financing the national debt.
That debt is now nearly $40 trillion, larger than our entire annual GDP. Every percentage point increase in financing costs forces even more Treasury issuance to cover the interest, which compounds the problem further.
There’s no clean path here. He may have to choose between inflation and a credit crunch. That’s the Jello-on-the-wall problem.
Bottom Line
Kevin Warsh is walking into one of the more genuinely difficult jobs in recent Fed history. Supply shocks don’t respond neatly to rate policy. The balance sheet is expanding again. Commodity prices are climbing. And the political pressure to keep rates low is real.
At BIP Wealth, we’re not waiting to see how it plays out. We’ve already adjusted. Whether Warsh turns out to be the person who can nail Jello to a wall, we’ll find out soon enough.
If you want to talk through how your portfolio is positioned heading into this period of uncertainty, reach out to us to connect with a BIP Personal Wealth advisor.
This blog is provided for informational and educational purposes only and does not constitute investment advice or a recommendation to buy or sell any security. Investing involves risk, including the potential loss of principal. Past performance is not a guarantee of future results. Fixed income investments are subject to interest rate risk; bond values generally decline when interest rates rise. References to the Bloomberg U.S. Aggregate Bond Index and 3-Month Treasury Bill Index are for illustrative purposes only; indices are unmanaged and not available for direct investment.
The Consumer Price Index (CPI-U) and Producer Price Index (PPI) are published by the U.S. Bureau of Labor Statistics. Federal Reserve balance sheet data sourced from the Federal Reserve Bank of St. Louis (FRED).
Statements regarding BIP Wealth’s past portfolio positioning are historical in nature and are not indicative of future results or actions. BIP Wealth is a registered investment advisor with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training.
