Fed chair nominee Kevin Warsh just threw Jerome Powell under the bus and signaled a major shift at the central bank

It's the end of an era at America's foremost financial institution, the Federal Reserve. May 15 will mark the final day of Jerome Powell's term as Fed chair and potentially the beginning of Kevin Warsh's term as head of the central bank.

It may also signal the start of heightened volatility for the Dow Jones Industrial Average (DJINDICES: ^DJI), S&P 500 (SNPINDEX: ^GSPC), and Nasdaq Composite (NASDAQINDEX: ^IXIC).

Jerome Powell's term as Fed chair is in its twilight

The writing had been on the wall for some time that Powell wouldn't serve a third four-year term.

Though Powell was appointed Fed chair by President Donald Trump during his first term, Trump and Powell have been vocally feuding since early 2025. Trump has opined that interest rates should be aggressively cut to 1% (or lower), while Powell has repeatedly proclaimed that economic data will guide policy decisions.

On Jan. 30, the president nominated Kevin Warsh to succeed Powell. Warsh spent five years (Feb. 26, 2006 – March 31, 2011) on the Board of Governors of the Federal Reserve and was a voting member of the Federal Open Market Committee (FOMC) -- the 12-person body, including the Fed chair, that is responsible for setting the nation's monetary policy. He would bring firsthand experience to the position if confirmed by the Senate Banking Committee and U.S. Senate.

But a Warsh-led Fed would entail changes, as evidenced by the Fed chair nominee's testimony to the Senate Banking Committee.

Fed Chair nominee Warsh points the finger at the Fed's bloated balance sheet

Last week, Warsh was questioned by the Senate Banking Committee about central bank independence, interest rates, and the health of the U.S. economy, among other things.

One question in particular, from Sen. Raphael Warnock (D-GA), struck a chord with Warsh. In response to Warnock's comments about working families struggling with elevated inflation, Warsh had this to say:

If the Fed were to execute on a series of policy reforms, then I believe the economy can be stronger... Had the balance sheet not been brought from the $800 billion level when I showed up at the Fed in 2006 to an order of magnitude higher... I think interest rates could be lower, inflation could be better, and the economy could be stronger.

Warsh has been an unabashed critic of the Fed's ballooning balance sheet, which is mainly comprised of long-term U.S. Treasury bonds and mortgage-backed securities, rising from less than $900 billion in August 2008 to almost $9 trillion by March 2022. Under Powell's tenure, this balance sheet effectively doubled, before settling at $6.7 trillion, as of April 22, 2026.

Warsh subtly throwing Powell under the bus makes clear that he aims to meaningfully reduce the central bank's balance sheet. Regardless of whether this is the right move, it can have huge consequences for lending markets and Wall Street.

Since bond prices and yields are inversely related, selling trillions of dollars in bonds would be expected to weigh on prices and increase yields, thereby raising borrowing costs. A historically expensive stock market that's counting on lower interest rates to fuel artificial intelligence data center expansion isn't going to be happy if lending costs rise.

A major narrative shift may be on the horizon, and the Dow, S&P 500, and Nasdaq Composite could end up paying the price.

Sean Williams has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.