With phrases like “unwise choices,” “bloated balance sheet” and “the tyranny of the status quo,” Kevin Warsh’s recent opinion piece on the state of the Federal Reserve didn’t pull any punches.

Published in Sunday’s edition of The Wall Street Journal, the former Fed governor’s essay titled “The Federal Reserve’s Broken Leadership” is part critique, part job pitch for his own candidacy to become the next head of the world’s largest central bank.

“Americans would have higher pay and greater purchasing power if the Fed got its act together,” Warsh declared.

Warsh, who served on the Fed’s board from 2006 to 2011, is a distinguished visiting fellow in economics at Stanford University’s Hoover Institution.

In October, Treasury Secretary Scott Bessent confirmed that Warsh is among the five finalists to replace Fed Chair Jerome Powell when his chairmanship term ends in May 2026. The others are current Fed governors Christopher Waller and Michelle Bowman; BlackRock fixed-income executive Rick Rieder; and National Economic Council Director Kevin Hassett.

AI outlooks

A prevailing theme of Warsh’s piece is his bullishness on artificial intelligence.

“AI will be a significant disinflationary force, increasing productivity and bolstering American competitiveness,” Warsh wrote. “Productivity improvements should drive significant increases in real take-home wages. A 1-percentage-point increase in annual productivity growth would double standards of living within a single generation.”

Philip Jefferson, the Fed’s vice chair, had a more measured take on AI’s impact on inflation and the labor market during a speech at an economic conference in Germany earlier this month.

“By automating certain tasks, it could lead to a reduction in some types of jobs,” Jefferson said. “But increased productivity leads to economic growth, which may create new employment opportunities. AI is also expected to create new job categories and transform existing ones.”

As for the disinflationary impacts of AI, Jefferson thinks “AI’s effect on inflation is not solely downward pressure,” noting that while it will likely help the economy achieve higher growth through increased productivity, it “could put upward pressure on certain price categories as many firms push to scale up the technology.”

Warsh, by contrast, argued that “inflation is a choice, and the Fed’s track record under Chairman Jerome Powell is one of unwise choices.”

Balance sheet banter

Warsh elaborated that he believes the Fed should “abandon the dogma that inflation is caused when the economy grows too much and workers get paid too much,” arguing that the Fed’s “bloated balance sheet, designed to support the biggest firms in a bygone crisis era, can be reduced significantly.”

“That largesse can be redeployed in the form of lower interest rates to support households and small and medium-size businesses,” Warsh concluded.

Jefferson, in a separate speech delivered Monday at a Kansas City Fed event, defended the central bank’s decision at its October policy meeting to stop shrinking its Treasury holdings and end balance sheet runoff on Dec. 1. He noted that reserves were “somewhat above the level judged as consistent with ample reserve conditions.”

The Fed vice chair addressed his support for October’s quarter-point rate cut, noting that “downside risks to employment have increased.” But he tactfully hedged on further easing, saying the “evolving balance of risks underscores the need to proceed slowly.”

The two Kevins

The betting markets currently peg Warsh with the second-best odds to become the next Fed chair, behind Hassett. As of Monday afternoon, Polymarket, a cryptocurrency-based prediction market, put Hassett’s odds at 48% and Warsh’s at 16%. The betting site Kalshi had Hassett at 44% and Warsh at 18%.

The other Kevin on the Fed chair shortlist also weighed in on artificial intelligence during a CNBC appearance on Monday. Hassett said AI could cause a temporary “quiet time in the labor market” through increased worker productivity.

“Firms are finding that AI is making their workers so productive that they don’t necessarily have to hire the new kids out of college,” Hassett commented.

The National Economic Council director also acknowledged that grocery prices have not receded during President Donald Trump’s second term, despite the president’s recent claims.

In October, Trump told reporters he might make his selection for the next Federal Reserve chair by the end of the year. Bessent suggested the pick wouldn’t come before the next Fed meeting, which starts Dec. 9.

Should that timeline hold true, Powell’s successor would be waiting in the wings during his final three meetings in the central bank’s head seat.