What could a Warsh era mean for Fed policy?
CIO Daily Updates
From the studio
From the studio
Thought of the day
Thought of the day
President Trump's nomination of Kevin Warsh as the next chair of the Federal Reserve continued to reverberate through markets on Monday. Gold is down nearly 5% today at the time of writing, adding to its 9% decline on Friday. Last week's sell-off marked the metal's largest one-day decline since 2013, with investors viewing Warsh as less dovish than several alternative candidates who had been considered by the Trump administration. Although Warsh has spoken in favor of lower rates, he has also called for a reduction in the size of the Fed's balance sheet. As a result, investors view his nomination to have reduced concerns over the risk of the US dollar's debasement, which had been adding to demand for precious metals. S&P 500 futures are pointing to a roughly 0.7% decline at the time of writing.
The naming of Warsh came after last week's Fed policy meeting, at which the Fed held its policy rate steady at 3.50-3.75%. Policymakers also pointed to signs of a stabilization in the labor market, tempering market expectations for another cut in the first half of the year. Meanwhile, the nomination comes amid a Department of Justice (DoJ) investigation into current Chair Jerome Powell, whose term ends in May, and a period of heightened White House pressure on the Fed for deeper and faster rate cuts.
While legal and leadership headlines around the Fed may lead to periodic market volatility, we suggest investors remain focused on the factors that we believe will drive returns this year:
Fed policy may shift under Warsh, but probably not dramatically. Warsh’s nomination would mark a shift toward a more dovish chair, given his recent public advocacy for policy rates to be “a lot” lower. However, near-term changes to the easing cycle may be limited. Warsh is less of a continuity candidate, and his ability to build consensus within the current FOMC board, where the last vote saw just two dissents in favor of a cut, remains uncertain. Institutional inertia, sensitivity within the FOMC to political pressure, and the need for broad agreement mean policy changes are likely to be gradual. Warsh has been a critic of the Fed's balance sheet growth since the global financial crisis and favors a smaller balance sheet, an area of agreement with some Fed members. However, large balance sheet policy changes are unlikely without changes to banking regulations, which is a key factor limiting a reduction and rarely a fast-moving process.
Legal and political hurdles could also impact the transition. Warsh’s potential appointment follows months of criticism from President Trump directed at sitting Chair Powell. The DoJ has opened a criminal investigation into Chair Powell’s June 2025 testimony to the Senate Banking Committee, while fellow voting governor, Lisa Cook, awaits the outcome of her Supreme Court case challenging her dismissal in August 2025. Republican Senator Thom Tillis, a key member of the Senate Banking Committee, has indicated he will oppose confirmation of any Fed nominee until the DoJ investigation into Powell is resolved. While not our base case, delays could conceivably see Powell extend his tenure as chair past its expiry in May if these legal questions remain unsettled.
Recent guidance and economic fundamentals favor further easing. Recent inflation data show price pressures are elevated but primarily due to tariff-linked goods inflation. The labor market remains soft, supporting the case for further easing, though the Fed’s reduced concerns about employment downside risks and stronger growth signal a higher bar for additional cuts. We continue to expect additional easing from here, but the Fed remains data dependent, and we acknowledge market pricing now points to a move later in the year than we had initially forecast.
So while the future of Fed leadership matters, it is far from the only driver for markets. We remain constructive on equities and see more upside ahead, but think investors should refocus on broadening, both to capture the widening opportunity set and to diversify potential specific risks.
We like exposure to AI, financials, and health care, as well as global opportunities in markets like Europe, China, and Japan. Historical patterns show that Fed rate cuts outside recessionary periods have supported both US equity and bond returns. We continue to favor medium-duration quality bonds, which we believe will deliver mid-single-digit returns this year.
We also expect gold to recover from the latest setback. Multiple factors contributed to the sell-off following the nomination of Warsh, including investor profit-taking after recent gains, reduced liquidity in futures markets, and emerging risks associated with interest rates and the strength of the US dollar. Our analysis indicates that gold is currently in the mid- to late stage of its present bull market, moving from a consistent upward trajectory to one reaching new peaks but with intermittent drawdowns of 5-8%. Importantly, the factors historically associated with the conclusion of gold’s bull market—sustained elevated real interest rates, a structurally stronger US dollar, improved geopolitical conditions, and fully re-established central bank credibility—have not yet materialized.
As a result, we view this correction as a bout of volatility within a structural uptrend, rather than suggesting the end of the bull market. We continue to rate gold as Attractive and remain long the metal in our global asset allocation. We also believe the drop creates opportunities for income-seeking investors to consider monetizing the relatively high price volatility.