It’s been revealed today that Donald Trump is to nominate Kevin Warsh as Chair of the Board of Governors at the US Federal Reserve, to replace current Fed Chair, Jerome Powell, whose tenure ends in May. The appointment of Warsh, who served on the Fed’s Board of Governors from 2006 to 2011, will still need to be approved by the Senate.
In recent months, Trump has been increasingly criticising Powell for not cutting interest rates quickly enough, even threatening criminal charges. This has all led to a full scale and very public row which has brought serious questions about Central Bank independence.
Commenting on this choice, Stuart Clark, portfolio manager at Quilter said: “Investors will be breathing somewhat of a sigh of relief as Donald Trump confirmed he was nominating Kevin Warsh to Chair of the Board of Governors of the Federal Reserve. This removes an unknown we had leading up to the end of current Chair Jerome Powell’s term, and is certainly a lot more moderate of a pick than it could have been.
“Warsh was in contention for the job back in 2017 and as such comes to the role with a level of authority that is respected across the market. He has historically been on the hawkish side of monetary policy, and while he will naturally look to stay on Trump’s good side, this should help temper any expectation that the Fed will begin indiscriminately lowering interest rates when he takes the job. Concerns around Fed independence and an erosion on this should now be tempered, although Warsh’s words and actions will be scrutinised by market participants intensely. This appointment is also likely to calm markets, which had of late started to get more volatile. We have already seen the dollar recoup recent losses and the tear in the gold price end on the speculation of this news, and as always markets respond well to certainty.
“What Jerome Powell does next will be interesting to watch. He has the right to remain on the board and help set the monetary policy direction of the Fed, but whether he continues to have the stomach for it remains to be seen. The looming Supreme Court decision on whether Trump can remove board members will be critical. As ever in the world of a Trump presidency, things are never quiet and thus investors will need to keep on their toes.”
Luke Bartholomew, Deputy Chief Economist at Aberdeen Investments, says: “Warsh’s experience on the Fed, where he developed a reputation as a very competent crisis fighter with a good understanding of financial markets, and long track record of independent thought about monetary policy, means he is a credible nomination. As chair, he will almost certainly push for lower interest rates, consistent with our forecast of two 25bps cuts later this year. But he is unlikely to make much progress in shifting the Fed’s operating framework and shrinking its balance sheet, taking much of the potentially hawkish sting out of his tail.”
Xiao Cui, Senior Economist, Pictet Wealth Management said: “President Trump has nominated former Fed Governor Kevin Warsh to lead the Federal Reserve, and we expect Warsh to be ultimately confirmed by the Senate.
“Despite Warsh’s hawkish reputation due to his criticism of the inflationary impact of QE during his tenure on the Fed Board, he has recently advocated for interest rate cuts, arguing that the FOMC is overreacting to mistakes made during the pandemic-era inflation period and should look through tariff-driven inflation. Warsh favors supply side policies over demand boosts and will likely emphasize productivity-driven growth in his argument for continued rate cuts. With inflation projected to decline and labor market vulnerabilities persisting, we still believe two rate cuts remain likely later this year.
“Warsh has long criticized the size of the Fed’s balance sheet, and he has advocated for a “new Treasury-Fed accord”, which emphasizes coordination between the Fed and the Treasury to reduce the balance sheet while allowing for lower rates. The Fed’s balance sheet is currently expanding and any decision for a reduction is determined by the full FOMC, not solely by the Chair. We don’t expect changes to the Fed’s balance sheet policy this year other than what has been announced regarding reserve management purchases.
“More banking deregulation is likely under Chair Warsh. Warsh has consistently advocated for limiting the Fed’s role in banking regulation and supervision, arguing that its independence should primarily apply to monetary policy rather than regulatory functions.
“A Warsh Fed would likely see meaningful changes to staff, communication strategy, and approaches to economic forecasting. Warsh has been a frequent critic of the Federal Reserve – he has called for “regime change” and paring back of the Fed’s “institutional overreach” to restore Fed credibility. He has criticized data dependence, forward guidance, and the Fed for being “stuck with models from 1978”.
David Roberts, Head of Fixed Income at Nedgroup Investments, has said: “The bond market sold off a little and the curve steepened. Risk assets fell a little. I think that latter part is understandable as Warsh is probably the “least dovish” of the four shortlisted. I’m surprised at the rates reaction – I thought we might have seen more short end weakness and a rally in longs (less rate cutting now restricts future inflation and should be all round good for a curve flattener).
“We have been running underweight US with a steepener and playing the spread in 10-year between US and Germany, which in our view compressed too much last year and was too narrow for an ECB on hold and a Fed possibly politicised to cut too far – saw a decent chance of US “twist” around seven years.
“We haven’t closed out the US/Germany trade which has worked well year-to-date. However, on the overnight move above 4.9% we did add US ultra long bonds to move closer to index neutral – that still leaves us favouring a steeper curve but much less than we had been.”
Joe Mazzola, Head Trading & Derivatives Strategist at Charles Schwab said:
‘US investors awoke to a new Federal Reserve chairman nominee as President Trump named Kevin Warsh to take over in May from Jerome Powell. Warsh served on the Fed’s Board of Governors from 2006 to 2011. Stocks fell steeply overnight but clawed back some losses after the news.
“Warsh was a hawk in his previous time at the Fed,” said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research (SCFR). “The question is, will he change his views to please the president?” Trump has long pushed for lower rates, and may face a challenge as Sen. Thom Tillis, a North Carolina Republican, posted he will oppose the nomination until the federal criminal probe into Powell is resolved.“
