Warsh takes office as Federal Reserve Chairman: Not a partisan victory, but a systematic guarantee for the miracle of AI productivity.

Written by: Raoul Pal

Translated by: AididiaoJP, Foresight News

The Senate today confirmed Kevin Warsh as the 17th Chairman of the Federal Reserve with a vote of 54 to 45, marking the closest vote in the agency's history. The media interprets it as a political story: Trump finally gets his wish, the Democrats fight back, Fetterman switches sides to vote in favor, and partisan divisions now extend to the Federal Reserve.

This is just the surface; the real story is understood by few. To see this clearly, you must stop evaluating this vote with a scoreboard of left and right, and instead ask a different question: Who chose Warsh, what did they gain by choosing him, and what does this mean for the market in the next two years?

Why Warsh?

I want to start from an unusual place because the framework is important.

For the past few years, I have been developing a framework called Universal Code. Its first law is simple: the universe is organized to maximize the intelligent output generated per unit of energy consumed. Life produces more intelligence than mere chemical reactions, civilizations produce more intelligence than biology, and AI produces more intelligence than civilizations built around human cognition. Because this is the gradient chosen by the universe, capital will follow it. Capital flows to any configuration that can generate the most intelligence per unit of energy at any given moment.

This is the first law of the Universal Code. It applies to biology, civilization, markets, and AI training operations. Currently, on the actual trajectory of the world, the configuration that wins this gradient is the semiconductor cycle accelerated by the overlay of artificial intelligence, compounded further by energy construction, all of which is in exponential phase growth. Capital is being pulled towards this configuration by a force that conventional macro models cannot explain, as conventional models lack the first law. So everything else is following suit, with political alliances being reshaped around who can provide access to the underlying substrate. Geopolitical alliances are being reshaped around who controls the chips, energy, and the dollar pipelines funding it all. This week's summit in Beijing, the computing infrastructure construction in the Gulf region, the return of Western semiconductors, and the alliance of funders reshaping Washington politics are all not independent stories.

They are expressions of the same gradient at different scales; countries and alliances aligned with the gradient will experience compounded growth, while those opposing it will decline.

If you accept this framework, then the most important variable in the macro environment over the next decade will be whether monetary policy hinders or aligns with this path. A Federal Reserve that fights AI development with restrictive interest rates will stifle the transformative substrate that the global economy currently relies on. A Federal Reserve that aligns with it will unleash the productivity wave.

Kevin Warsh is the candidate for Federal Reserve Chairman who possesses the deepest personal insight into this route. For most of the past decade, he has not been a central bank official, but a board member and technology investor. He has served as a board member and, as a private investor, allocated capital to the AI infrastructure stack. He observes from inside the room where this development is constructed, not from the FOMC briefing book. When he states his belief that a productivity boom will lead America into the 21st century, he is not making an optimistic prediction. He is expressing an investor belief based on what he has witnessed firsthand and personally invested in.

This is the part that media coverage has largely overlooked; he is not a hawk changing camps because of Trump's promise of a position. He is an investor who has been bullish on the productivity miracle for years and now controls the institution that will determine whether this miracle can compound growth or be strangled by tightening monetary policy. The other major candidates Trump considered did not have this background. One was an academic economist, the other was a community banker; Kevin Warsh is the only one among the three who has truly deployed capital into the substrate for the next decade.

This makes him a candidate aligned with the first law, as both his public beliefs and personal investment portfolio point to keeping the fastest pathways for intelligence compounding open.

What Warsh has been saying

Over the past twelve months, Warsh has proposed an unusually specific monetary policy agenda in public records. He has explicitly called for what he terms a "regime change" at the Federal Reserve. He has called for establishing a new framework for the Fed akin to the 1951 Agreement. He has proposed to reform the inflation data used by the Fed. He has proposed removing forward guidance from communication, and he has proposed encouraging more internal dissent in interest rate decision-making. He has proposed to reduce the Federal Reserve's balance sheet and coordinate this posture with Treasury debt management.

Taken alone, these proposals sound like the technical preferences of a thoughtful former Fed governor. Taken together, they describe an operational model that combines two different historical backgrounds: one is the financial repression strategy from 1946-1955, and the other is the productivity-led strategy from Greenspan’s late 1990s. The combination of the two is precisely what is needed right now.

Greenspan's strategy as the true template

The framework from 1951 is a rhetorical cover; it is Greenspan's late 1990s strategy that is the actual operational template.

Here is what Greenspan did from 1996 to 2000. The economy was running hot, with unemployment below the so-called natural rate in conventional models. During this time, CPI overall increased at certain points due to fluctuations in oil and food prices. But the important data point is that core inflation, excluding food and energy, did not accelerate as predicted by the Phillips curve. Greenspan looked at productivity data and concluded that some structural issues were occurring.

The IT investment cycle was driving productivity growth, suppressing unit labor costs without requiring a relaxation of the labor market. Even with overall CPI fluctuations, core CPI remained anchored. He concluded that he could ignore the noisy overall data because the underlying core was being suppressed by productivity. Conventional dogma said to raise rates significantly to prevent impending inflation. Greenspan rejected this; he maintained low interest rates, letting asset prices run. He allowed the expansion to compound for four years longer than conventional reaction functions would have allowed. His coordination with then-Treasury Secretary Rubin and later Summers was termed the "Committee to Save the World."

The Federal Reserve and the Treasury effectively operated as a single institution running a strategy. Greenspan's final rate hikes in 1999-2000 are now widely understood as a policy mistake; productivity could have absorbed more inflation.

What Bessen and Trump want is the 2026-2030 version of this operation. AI is a much larger equivalent to the IT cycle. AI capital spending is running multiple times that of tech capital spending in the late 1990s. If the productivity wave is real, then the Fed can run a looser policy than conventional models suggest, because even when the economy is running hot, productivity will suppress unit labor costs. A slight rate cut, without dramatic action. Allow productivity to absorb the easing, allowing the economic transformation to do the deflationary work that no rate hikes could manage.

This is why Warsh is essential. He is the candidate who truly believes in the existence of the productivity miracle because he has been investing in it. He has the institutional credibility from his time during the global financial crisis from 2006-2011 to hold the line when the media and traditional Fed network demand that he raise rates in response to the latest CPI data. He possesses rhetorical cover (the 1951 framework) to install a coordinated structure without appearing captured. And he has a personal belief in repeatedly doing "nothing" in the face of inflation data that would force weaker conviction traders to react.

Greenspan's strategy only works if the trader implementing it truly believes in the reality of the productivity miracle. This is the test; Powell does not have deep enough conviction. Warsh may read it from the data, but he does not have Warsh's investor conviction. Warsh is the only available candidate who has personally bet on this.

Why must this happen?

The United States federal debt is approximately $36 trillion. Based on the current maturity structure, about $9-10 trillion rolls over every year. The Fed has been raising rates while running quantitative tightening, which means it's reducing its own balance sheet while the Treasury issues record amounts of debt to fund the deficit. The marginal buyer of long-term treasuries must be the private sector, much of which consists of foreign buyers.

This works in a world where foreign buyers structurally over-allocate dollars. In our world, where China has net sold treasuries for several years and Japan is managing its weak currency with its inability to expand significantly its holdings, the situation is different. Long-term yields drift higher. The term premium expands. The cost of refinancing debt rises faster than economic growth. It becomes more difficult each year.

You can solve this in two ways. You can implement fiscal tightening, which is politically impossible at the scale needed. Or you can implement financial repression, with no honest option to confront the numbers.

The structure being built is the financial repression option, wrapped in modern institutional language, and combined with the productivity bet from Greenspan, making it sustainable socially. The Treasury issues short-term debt at the front end of the curve, where demand is structurally inelastic. Banks are rebuilding balance sheets under a new regulatory framework to absorb duration at the back end of the curve. The Fed operates a posture that does not counter this structure through aggressive rate hikes. Stablecoin issuers absorb hundreds of billions of short-term treasuries as part of their reserve composition. The dollar depreciates to levels attractive for foreign duration buyers.

To achieve this, you need a Federal Reserve chairman who accurately understands the situation and does not confront it. Warsh has been publicly describing the precise policy posture required by this structure for the past twelve months; this is not a coincidence.

Bessen's international operations

Another key player in this structure is Bessen at the Treasury. Most reports depict Bessen as a domestic figure with a fiscal portfolio. This is mistaken; Bessen's most important work is at the international level.

This structure requires foreign buyers to absorb a meaningful share of long-term treasury issuance to ensure that the rolling math clears at acceptable real yields. Foreign buyers will only engage when three things are true: The dollar must depreciate rather than appreciate, or they will bear currency losses. They must have strategic reasons for holding treasuries, not just yield, as yield alone cannot offset currency risk. They need an institutional channel through which to recycle their dollar surpluses back into U.S. treasuries.

Bessen is simultaneously running all three of these. Yesterday's summit in Beijing was the most visible part; the framework negotiated with China is primarily not a trade agreement. It is a management framework where China gains explicit access to the U.S. substrate (chips, capital equipment, AI infrastructure) under specific licensing arrangements, in exchange for not selling its dollar reserves, continuing to recycle trade surpluses back into treasuries through intermediary chains, and accepting substrate access tariffs (the Nvidia 25% fee model is a validated example). This is not a free trade arrangement; it is a financial repression-era industrial agreement wrapped in trade language.

Parallel models with Japan and Korea (the cleanest channel for North Asian surpluses into U.S. treasuries) are also running. With the UAE (being built as a new mediating pole expanded through the Fed's swap lines). With Hong Kong (as a traditional channel for China, kept for continuity). With Singapore (as the remaining cross-Asian clearing center). The structure is designed to be multipolar rather than bilateral. Bilateral arrangements have a failure point; multipolar arrangements have redundancy. Bessen is connecting redundant foreign duration buying into the rolling structure.

This is where Warsh and Bessen coordinate, and why the Fed agreement that Warsh repeatedly cites is substantively important. Bessen ensures foreign duration buying through bilateral agreements and currency management. Warsh ensures that Fed policy does not break the buying by being overly restrictive. If the Fed runs a tightening policy, U.S. real yields rise, foreign holders bear heavier currency losses, making it harder for foreign duration buyers to clear. If the Fed runs a loose monetary policy, U.S. real yields fall, the dollar depreciates, allowing foreign buyers to absorb treasury issuance on acceptable terms. The agreement is the institutional document that allows the Fed to operate in the second posture rather than the first.

The "Committee to Save the World," run by Greenspan and Rubin twenty-five years ago, coordinated such efforts; the LTCM rescue, the response to the Asian crisis, and the late 1990s productivity boom all operated within the same coordinating framework. Warsh and Bessen are the 2026 version of this committee. The difference is that the 2026 version faces a more controversial international financial architecture than Greenspan and Rubin ever did.

The funders' alliance

Below the visible political layer is the decisive alliance of funders that has emerged since 2024. Crypto founders, AI infrastructure operators, and energy capital allocators. These people fund the political operations delivering this framework. They are not purchasing ideology. They are buying execution. They want clarity on stablecoin regulations, stability in AI capital expenditure policies, acceleration of energy permits, and a monetary policy environment that does not strangle AI development with restrictive rates.

The Trump administration is the operator, with Bessen at the Treasury as the architect of the international leg. Warsh at the Fed is the domestic institutional anchor. The Republican Senate majority is the formal delivery mechanism. The funders' alliance is the deeper substrate beneath it all.

When you read Warsh's confirmation in this framework, it no longer appears as a partisan struggle; it begins to look like an executed contract. The funders' alliance wanted the Fed chair seat, they got the Fed chair seat, and the voting outcome is the formal document of delivery.

What this means for the market

If you accept this framework, then several things will follow.

The first FOMC meeting under Warsh will be June 16-17. He cannot cut rates while overall CPI is above 4% and energy prices are high without immediately destroying his credibility. Therefore, the meeting will not deliver a rate cut; it will deliver a signal, and this signal will be more specific than the media expects. Warsh will begin to shift the institutional focus from overall CPI to core, describing the surges in energy prices driven by the U.S.-Iran war as temporary. He will signal that the 2% target has more leeway than the market is currently pricing, viewing it as a long-term average rather than a hard monthly cap that every print must adhere to. He will soften forward guidance, using a more discretionary tone in the response language. He is almost certain to initiate a formal monetary policy framework review aiming for completion by 2027. None of these are rate cuts, but all of these are institutional restructurings that will allow rate cuts to come later without being interpreted by the bond market as a political concession.

By the end of 2026, the framework review will be public. By mid-2027, a visible Fed agreement will be announced or formally negotiated. By the end of 2027, the federal funds rate will be 250 to 325 basis points lower than current levels. The Fed will clearly ignore inflation indicators in the 3-4% range while nominal GDP runs at 5-6%. Gold continues to rise, as financial repression represents the moment of gold pricing. The dollar depreciates to levels sufficient to clear foreign duration buying. Cryptocurrencies compound growth because the substrate transformation operates independently of monetary policy, and the institutional guarantees of this framework have just become more solid with the Fed chair seat. AI capital expenditure names compound growth because the cost of capital is no longer a tail risk.

One variable could disrupt the entire setup. It is not Warsh's policy preferences; it is the bond market itself.

If long-term treasury yields continue to remain above 5.5%, or the term premium remains above 1.5%, or the real yield on the ten-year continues to exceed 2.75%, then regardless of what Warsh does at the Fed, the structure will crack from the outside in. The bond market is the constraint; Warsh's confirmation removes one institutional risk, but not that one.

This is why the next six months are so critical. They will be the bond market either giving the new Fed chair space to install the structure or not. If they do, the cycle extends at least to 2027, possibly into 2028. Risk assets compound growth. Cryptocurrency and AI capital expenditure names are the biggest beneficiaries. If the bond market pushes back in the next six months due to hot inflation data, then the structure is at risk of failing before operational presence.

What to remember

First, Warsh is not as the news suggests; he is not Trump's puppet. He is the right operator structurally for what they are actually trying to do, namely running Greenspan's late 1990s strategy on top of the 1946-1955 financial repression framework, with AI replacing the IT cycle as the engine of productivity. His background as a technology investor is the key qualification, not his record as a Fed governor from 2006-2011. He has been bullish on this miracle for years.

Second, Bessen's international framework is the other half of this operation. The Fed agreement that Warsh keeps citing is an institutional document. The real substance is that Bessen ensures foreign duration buying through bilateral agreements with China, Japan, Korea, the Gulf, and a broader multipolar network, while Warsh runs Fed policy aligned with Treasury financing needs. The two operators are indispensable. This week's agreement with China and today's confirmation of Warsh are two pieces of the same structure, not two independent stories.

Third, the real test is not Warsh's first FOMC, but the behavior of the bond market over the next two quarters. Watch the 10-year yield, term premium, and real yields. These are the variables that will determine whether the structure executes or breaks apart.

The market is still pricing the conventional struggle with inflation. The framework views the conventional struggle as structurally unlikely, as the productivity wave will do the deflationary work that the Fed cannot accomplish, while foreign duration buying clears the rolling that the bond market cannot clear alone.

The gap between these two pricing is the asymmetry. This asymmetry is where the returns will be in the next two years.