Fed Chair Kevin Warsh is actually managing U.S. debt costs not inflation, economist says, as interest rates threaten to top GDP growth soon

As President Donald Trump’s hand-picked Federal Reserve chairman, Warsh was expected to lean toward looser monetary policy. Then he declared that inflation was a “choice,” suggesting a tougher approach.

Over the summer, he suggested looking at alternative inflation gauges and that the bond market would do some of the Fed’s tightening work, hinting as less aggressive policy.

But he delivered a hawkish speech at the Jackson Hole conference in August, and led the Fed to a unanimous rate hike in September.

Last week, he held off on backing another rate hike, despite inflation heating up again, with his lack of explanation and refusal to offer any hints about the next policy decision producing an overall dovish effect.

But Robin Brooks, a senior fellow at the Brookings Institution, said asking whether Warsh is a hawk or a dove is the wrong question. Instead, he views all the mixed messages from the Fed chair through a different lens, arguing the hot inflation readings can’t rationalize Warsh’s statements.

“We’re not in hawkish or dovish land. What’s happening is yield curve management, which itself is a function of how precarious the U.S. debt picture is,” Brooks wrote in a Substack post on Thursday.

That’s because the surge in Treasury yields this year threatens to worsen the already-grim outlook for U.S. debt, which is now above $40 trillion in gross terms with publicly held debt at 100% of GDP.

In fiscal year 2026, which ended in September, the federal government’s debt-interest costs topped $1 trillion, exceeding defense spending.

“The bottom line is that inflation and other macro data are secondary,” Brooks added. “The twists and turns in Fed policy are about what’s going on with long-term yields.”

He suspects the Fed and Treasury Department are in a de facto accord to keep borrowing costs stable. Brooks pointed to Treasury Secretary Scott Bessent’s surprise announcement to buy back more long-term bonds, briefly lowering yields.

Bessent also intervened in the currency market to prop up the yen without Japan having to sell its holdings of U.S. debt, which would have lifted yields.

The actual effectiveness of these attempts at managing bond yields is a different story. Expectations for the Iran war to re-escalate have sent oil prices and yields higher. Signs that the U.S. economy is running hot have also raised inflation and rate forecasts.

But the U.S. also caught some breaks too. Fears that the AI boom, a major driver of GDP growth, will go bust have taken pressure off yields. France’s political turmoil and fiscal dysfunction have sparked worries that it will trigger a debt crisis that spreads to other parts of the eurozone.

Investors have since embraced Treasury debt again as a safe have asset, and the 10-year yield has dipped back below 5% again.

“Warsh is neither hawk nor dove,” Brooks declared. “Instead—like Bessent—he’s just trying to keep long-term yields manageable.”

Such management risks putting the U.S. on the path toward so-called fiscal dominance, where high debt and deficits override the Fed’s ability to independently manage monetary policy and fight inflation.

Economists have pointed out that as long as nominal GDP growth remains above interest rates, then the U.S. can avoid a debt spiral where borrowing costs pile up faster than the economy expands.

But bond yields have risen so high and so quickly this year that they have blown past long-term estimates, raising alarms about the debt trajectory. In fact, the Congressional Budget Office was asked to assess scenarios where yields are 150 basis points and 50 basis points higher than the watchdog’s baseline of 4.3%.

Under the 150-point scenario, net interest costs go up by $4.9 trillion over the next 10 years, and publicly held debt reaches 133% of GDP by 2036. While yields have pulled back recently, they jumped more than 100 basis points over the CBO’s baseline earlier.

Analysts at Bank of America looked at the CBO’s numbers and estimated that in the alternate scenario, the effective interest rate on government debt will exceed long-term nominal GDP growth (assumed to be a 4% pace) as early as fiscal year 2028—which begins October 2027.

For now, nominal growth remains robust and was 5.6% in the third quarter, helped by the AI boom and high inflation.

“However, both forces are likely to prove more temporary than permanent unless AI adoption ultimately delivers substantial productivity gains,” BofA said in a note on Oct. 19. “Should that occur, concerns around fiscal sustainability would ease materially. Even so, we believe it is optimistic to assume the United States can simply grow its way out of its mounting debt burden.”