Kevin Warsh is President Donald Trump’s pick to be the next Federal Reserve Chair, and the market reaction was in full swing on Friday.
Warsh, who previously served on the Fed’s board of governors from 2006 to 2011, is set to take the helm at the central bank in May, pending Senate confirmation.
The pick came as a bit of a surprise to investors, who sold stocks, gold, and silver on Friday. Trump has long wanted the Fed to lower interest rates at a faster clip, and despite his recent dovish pivot, Warsh has historically advocated for hawkish policy.
Still, Warsh’s tenure doesn’t start for months, and how he’ll go about leading the Fed — and the 12 members of its Federal Open Markets Committee, which sets interest rates — remains to be seen.
Here are some takeaways for investors as they mull the future of the central bank.
Warsh may not be as dovish as he’s letting on
While Warsh suddenly flip-flopped and argued for rate cuts in November 2024 — a move which many viewed as an attempt to curry favor with Trump — some economists wonder just how dovish Warsh will be once he gets in the job.
“It’s reasonable to assume that he told the President he favors reducing interest rates today, otherwise he would not have been nominated,” said Samuel Tombs, chief US economist at Pantheon Macroeconomics, in an email.
“But Mr. Warsh’s hawkish instincts might return once he has secured the Chairmanship. The minutes of FOMC meetings during the GFC — Mr. Warsh served on the Board of Governors from 2006 until he resigned in 2011 — and his criticism of monetary stimulus during the Covid pandemic imply that he is more likely to prioritize hitting the 2% inflation target than ensuring maximum employment in times of crisis,” he continued, adding: “In the event of persistent near-3% inflation, our instincts tell us Mr. Warsh will be more preoccupied with how history will view his record than with continuing to pander to the President.”
Warsh’s nomination shows Trump doesn’t want to fan fears about Fed independence
Despite all of Trump’s handwringing about wanting lower interest rates, there are probably candidates he could have chosen who have demonstrated a greater willingness to follow the president’s wishes when it comes to monetary policy.
His nomination may be a sign that Trump knows the value of an independent Fed, and is aware of the importance of how markets will perceive the new central bank boss.
“The administration’s selection of this Kevin, Kevin Warsh instead of Kevin Hassett, is a nod to recognizing the need for independence,” Jason Pride, Chief of Investment Strategy and Research at Glenmede, said in an email. “While Warsh may be more inclined toward rate-cuts than Chair Powell, he is likely to be perceived as expressing his own opinion more than someone nominated from within the President’s inner circle.”
A hawkish Fed could be bad for the AI trade
If Warsh does turn out to be a policy hawk, that could put a hole in some of the frothier parts of the market, like the AI trade, said Mark Malek, CIO at Siebert Financial.
Lower rates often fuel bets on high-growth or more speculative stocks. The period of near-zero interest rates during the pandemic egged on a speculative frenzy in stocks and crypto that came crashing down in 2022 when rates went back up.
Today, the thinking in markets has been that a dovish Fed would continue to support stock gains, denting the appeal of bonds and and keep markets liquid. Warsh might complicate that view, however, and AI stocks could be at risk.
“Tighter liquidity will accelerate the filtering process in AI and tech, exposing which companies have real unit economics versus those just riding the hype wave,” Malek said in an email.
“Warsh’s tight money policy could pop the AI bubble before it fully inflates, weeding out pretenders now instead of suffering a catastrophic crash later,” he added.
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