Incoming Fed chairman takes over the central bank at a pivotal moment: AI is estimated to reshape the economy as we know it (for better or worse, depending on who you ask), geopolitical tensions are rising, and consumers are hollering for relief from the cost of living.
There’s also the small matter of national debt—the interest on which is influenced, in part, by the U.S. Federal Reserve.
The lines drawn in the sand by politicians during his Senate Banking Committee hearing were clear: There was little Warsh could do to deter Republicans from backing his nomination, there was virtually nothing he could say to convince the Democrats.
Wall Street can afford to be a little more discerning: There may be aspects of Warsh’s policy stance that benefit investors, while other behavior might leave analysts feeling a little spooked.
One thing’s for sure: No one’s short of opinions when it comes to the new Fed chairman.
Green flag: consensus
Powell staying on at the Fed presents an awkward transition for Warsh at the central bank. Warsh has been critical of the decision-making of the Fed under Powell’s leadership, and argues for a fundamentally more dovish policy stance while his predecessor has favored a wait-and-see approach.
Already, members of the Federal Open Market Committee have demonstrated they’re not comfortable sending overly optimistic signals to markets. At the latest FOMC meeting, regional presidents Neel Kashkari of Minneapolis, Lorie Logan of Dallas, and Beth Hammack of Cleveland all dissented from the post-meeting statement, as they felt it suggested the next move by the group could be a cut—a signal they did not want to send.
With dissent already on the rise, a green flag for analysts is a Fed chairman who can build consensus.
David Doyle, head of economics at Macquarie, said his confidence in the institution would materially increase if Warsh stresses collegiality and open-mindedness in his early days at the Fed, explaining: “This would indicate he is not inclined to lead from a place of dogma or ideology, but one of pragmatism and would be more likely to consider the views and input of others.”
Analysts had been quick to stress that concerns over the directions of the Fed under Warsh may be oversimplified—he is, after all, just one voice on monetary policy. But there is an argument that his is the voice markets will heed. “With the way the Fed operates right now—relying more on forward guidance than on actual policy changes—having a ‘consensus Fed’ is critical. The Fed must present a unified front, which includes no dissent from the chair, for forward guidance to be impactful and carry weight,” Jack Manley, a global market strategist at J.P. Morgan Asset Management, tells Fortune.
Red flag: Moving too quickly on the balance sheet
Another issue rising on the agenda are Warsh’s thoughts on the balance sheet. The former Fed governor has made it clear he wants to significantly reduce the $6.7 trillion value of the balance sheet and reduce distortions the central bank causes in market signaling.
This is a precarious tightrope to walk, with bond investors primed to sell if there’s a hint the biggest player in the market upsets the apple cart. As Joe Brusuelas, chief economist at RSM, tells Fortune, premature action would be a major risk: “In a market that relies upon liquidity and leverage, that would inject an unnecessary risk into an economy that is over-reliant upon the financial sector.”
Elsewhere, Eric Winograd, chief U.S. economist at Alliance Bernstein, agrees with Warsh’s principle but is curious about his process: Will a few regulatory tweaks suffice? How deeply will regime change go? How sensitive will he be to money markets reacting to new balance sheet policy?
“It is extremely doubtful that he will provide real answers on any of this. Confirmation hearings are political theater rather than substance, and he [was] plenty smart enough to avoid saying anything tangible,” Winograd added. “The Congresspeople questioning him are going to be more focused, I suspect, on pushing him again on independence. He will simply repeat what he said in his committee hearings, I’m sure.”
Green flag: Market relationship
One element of Warsh’s “regime change” that has caught the attention of analysts and the media alike is his take on forward guidance—something the new chairman would be keen to change. Warsh has expressed concern that tools like the dot plot may tie the Fed into promises it can’t keep, and has echoed calls from the likes of economist Mohammed El-Erian and Treasury Secretary Scott Bessent for a “backseat Fed,” with more limited updates shared with the public.
If Wall Street were to see a change in the frequency of speeches, or a change in the Summary of Economic Projections, division in the Fed wouldn’t be as exposed and therefore a consensus would be less important, added Manley: “Markets wouldn’t like that shift, but they’d get over it eventually as they are extremely adaptable (as evidenced by everything that’s happened over the past 14 months). It would ultimately just make ‘Fed day’ a much messier affair.”
Winograd added an indication from Warsh that he is sensitive to market volatility would also ease concerns. “If someone said: ‘The last time the Fed went too far, the repo market performed poorly,’ and he said: ‘Markets go up, markets go down’ or, ‘That’s fine, they just need to learn to adjust to the new regime,’—some sort of idea that he isn’t sensitive to the function of markets—would be concerning as well,” the Alliance Bernstein economist previously told Fortune.
Red flag: Lack of independence
The existential question hanging over Warsh’s tenure is that of central bank independence from politicians. To some extent, this is unavoidable: The new chairman can only be nominated by the president. However, because of Donald Trump’s ongoing and controversial criticism of current Chairman Jay Powell (whom he also nominated), scrutiny of Warsh as an autonomous economist is all the sharper.
The Oval Office has demonstrated it will push further than other administrations in a bid to pressure monetary policy setters into lowering the base rate.
“The biggest question facing Warsh is political independence,” Aditya Bhave, head of U.S. economics at Bank of America tells Fortune. “It would be a green flag if his decisions are clearly data-driven. And a red flag if they aren’t.”
Warsh has insisted he has made no promises to Trump about the path of policy in order to land the nomination, but is inheriting a Fed at the height of price pressures—at present most pressingly because of geopolitical tension in the Middle East.
“The one major thing that Kevin Warsh could do to assuage concerns around central bank independence is a clear and concise statement in his maiden speech that lays out the obvious risks to the economy via the inflation outlook,” Brusuelas added. “With inflation at 3.5% and likely to move to 4% in the near term, that would, I think, calm some concerns about a Warsh-led Fed.”
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