May 28, 2026

3 Generations in Québec | Kevin Warsh Has Arrived as Fed Chair. Here's What it Means

"3 Generations in Quebec" is a new article series we're publishing with our Montreal-based team of Denis Durand, Eric Desbiens, and Michael Iuliani. Bringing 50+, 25+, and 10+ years of market experience, respectively, the trio brings unique and varied perspectives to current events. In this edition, Denis reflects on five decades of Fed Governors and the implications for Canadian markets.

It’s done. Kevin Warsh was sworn in on May 22 as the 17th chair of the Federal Reserve, after a Senate vote of 54 to 45, the narrowest in modern history. A single Democrat, John Fetterman of Pennsylvania, crossed party lines.

In Canada, the news was treated as wire-copy filler with no real analysis of what a changing of the guard at the most powerful central bank in the world may mean for us. Nobody seems to have caught the irony, either: our own Prime Minister once hired Warsh to do the exact opposite of what he now plans. I’ve spent 50 years watching these transitions. Each one reshaped the markets and every time, the effects were felt here at home, from St. John’s to Victoria, in our mortgages, our retirement plans, and our grocery bills.

Your beef, your gasoline, your mortgage

Warsh is taking office after US inflation jumped to 3.8% in April, the highest since May 2023. Beef prices rose 14.8% year over year. Gasoline, 28.4%. Brent crude has pushed past US$110 a barrel, driven by the Iran conflict. Grocery prices climbed 0.7% in a single month, the sharpest increase since August 2022. For the first time in three years, real wages in the US turned negative. Workers are earning less than inflation is taking away.

Why should American statistics worry a household in Terrebonne, Saskatoon, or Fort St. John? Because our financial markets are deeply integrated. The Fed’s policy rate sits between 3.50% and 3.75%; the Bank of Canada’s is at 2.25%. That 125-150 basis point gap puts pressure on our dollar. When the loonie weakens, the price of imported fruit, vegetables, and meat rises directly in our grocery stores. For the manufacturer in Drummondville or the fish exporter in Newfoundland selling in US dollars, every penny lost on the loonie eats into the profit margin.

Here at home, the vast majority of mortgages carry a five-year fixed rate. Hundreds of thousands of Canadian households will renew theirs in 2026, moving from a pandemic-era rate around 2% to something closer to 4.5%. On a typical Montréal mortgage of $475,000, that’s roughly $600 more per month. More than $7,000 a year. And if Warsh implements his plan to shrink the Fed’s balance sheet, long-term rates could climb further, pulling Canadian bond yields along with it, the way a shadow follows the walker.

The signs of strain are already visible. In the first quarter of 2026, over 37,000 Canadians filed for insolvency, up 8.5% from a year earlier and the highest quarterly number since the 2009 financial crisis. That equates to about 17 Canadians every hour, around the clock, for three months.

This is not theoretical. The 30-year US Treasury yield crossed 5% last week, its highest level since the fall of 2023. The shadow followed: the Government of Canada 5-year yield hit 3.35% and the 10-year reached 3.70%, both the highest since mid-2024. Canadian lenders have already raised 5-year fixed rates by 25 to 40 basis points in recent weeks. The bond market isn’t waiting for Warsh’s first meeting. It’s already moving.

Over $1.2 trillion reasons to pay attention

If you work in Canada, a portion of every paycheque goes to a public pension fund you can’t opt out of. Outside Quebec, that’s CPP Investments, with over $730 billion in net assets for 22 million Canadians and in Quebec, it’s the Caisse de dépôt et placement, which manages $517 billion for six million Quebecers. Given the Fed’s global reach, Canadians have over $1.2 trillion in mandatory pension savings directly exposed to Fed decisions, before you even count your RRSP or your employer plan.

Our Prime Minister, Mark Carney, knows Warsh well. They managed the 2008 crisis together, with Carney leading the Bank of Canada, Warsh as a Fed governor, in the same rooms, on the same calls. That kind of relationship, forged under fire, cannot be manufactured at academic conferences. It guarantees nothing, but it does mean each man understands how the other thinks.

Not your typical central banker

Warsh is 56, and while he holds degrees from Stanford and Harvard, he is not an academic economist. Before joining the Fed, he advised on mergers and acquisitions at Morgan Stanley. Appointed to the Federal Reserve Board at 35, the youngest governor in the institution's history, he was thrust into the 2008 crisis, where historian David Wessel describes him as one of the “four Musketeers” of the emergency response along with Ben Bernanke, Donald Kohn, and Timothy Geithner. He left in 2011, openly opposed to quantitative easing, and spent the next fifteen years working with Stanley Druckenmiller at Duquesne, one of the great investors of our era. This is not a campus theorist. He is someone who has put his own money on the line, a lot of it, and arrives at the Fed with a personal fortune well above US$100 million.

What he wants to change

If you had to sum Warsh’s reform agenda in a single phrase, it would be his favourite line: "Inflation is a choice." Warsh blames the Powell Fed for the 2021–2022 price surge. He wants an entirely new framework for measuring inflation, and above all, he wants to dramatically shrink the Fed’s balance sheet, which has ballooned from US$800 billion to roughly US$6.7 trillion. 

Think of the Fed as a doctor with two tools: the interest rate is the daily medication; the balance sheet is the IV drip running in the background. Warsh wants to unplug the drip, or at least turn it down dramatically, betting that a smaller balance sheet would allow lower short-term rates. In practice, shrinking the balance sheet forces the market to absorb more bonds, which pushes long-term rates higher. That’s where your mortgage comes back into the picture.

Warsh also wants the Fed to talk less. Much less. He suggested that central bank officials “skip opportunities to share their latest musings.” The irony is rich: in 2014, our Prime Minister, then Governor of the Bank of England, hired Warsh to do the opposite. The “Warsh Review,” published in December 2014, recommended more transparency, more publication of minutes, more communications discipline. The man Carney hired to teach the Bank of England how to talk straight now wants the Fed to go quiet.

The wall of reality

Trump nominated Warsh because he wanted rate cuts. He even joked in January that he’d sue Warsh if rates didn’t come down. Senator Elizabeth Warren, at the confirmation hearing, called him a ‘sock puppet’ for the White House. He replied that he would be nobody’s puppet. Puppet or not, the market reality is brutal: futures are pricing in zero rate cuts for 2026. In fact, more than half of investors now anticipate a rate increase by year-end. Inflation at 3.8%, driven by the Iran conflict, refuses to cooperate.

Warsh will chair a committee of 12, not a monetary dictatorship. Powell’s final meeting on April 29 produced four dissents, the most since 1992, split between hawks and doves. Stephen Miran, the governor who dissented at all six meetings he attended, always pushing for lower rates, left his seat on May 14 to make room for Warsh. The committee’s most reliable dove is gone.

While Fed chairs usually step down after their chairmanship ends, Powell has signaled he will stay on, possibly until his governor term ends in January 2028. That hasn’t happened since 1948. As long as he stays, Trump cannot appoint an ally to that seat, and Warsh will have to contend with a former chair who still has a vote at the table.

In 50 years in this business, I’ve rarely seen a Fed chair so boxed in before his first meeting. He takes office facing the highest 10-year Treasury yield of any incoming chair since Greenspan. If he lets bond yields keep climbing, he risks a credit tightening that hits the real economy, from mortgage lending to provincial borrowing costs. If he cuts rates to relieve the pressure, he pours fuel on an inflation rate that refuses to drop below 3%. And if he does nothing, hoping the situation resolves itself, the bond market may decide for him. Ask Liz Truss, whose government the bond market dismantled in days, how long it takes for markets to overturn credibility. If Warsh is right, and a leaner balance sheet does allow sustainably lower policy rates, the payoff for Canadian borrowers could be real. But that bet takes years to play out, and the bond market will test him long before the results are in.

Keeping a cool head

The day Warsh was nominated, gold dropped roughly 9%. Silver collapsed 31%, its worst single day since 1980, when the Hunt brothers tried to corner the market. Since then, the panic has subsided. Neither the fear nor the complacency was warranted.

Bank of Canada Governor Tiff Macklem chose his words carefully: “we all need the Fed to work well.” Translation: we can’t control what happens, but we’ll bear the consequences. But on domestic pressures, Macklem was blunt: surging gasoline prices combined with food inflation is “squeezing more Canadians.” More telling still, he suggested that if oil stays above US$100 a barrel, the Bank of Canada may need to raise its own rates, which it held steady at 2.25% in its April meeting. Its next decision comes June 10, six days before Warsh takes the reins of American monetary policy.

Warsh said publicly, under oath, exactly what he intends to change. He may not succeed. But the smart response isn’t panic. It’s attention. Watch the June 10 Bank of Canada decision and Warsh’s on June 16, and remember that what happens in Washington is not a foreign drama. It is a direct factor in the price of your groceries, the cost of your mortgage, and the value of your retirement savings because our bond market, our dollar, and our major banks are informal branch offices of the American financial ecosystem. Whether we like it or not. 

Author

Denis Durand

Senior Advisor