Does Warsh’s Nomination Change the Bullish Setup for Stocks?
Markets were handed yet another surprise announcement from the administration on Friday when Trump nominated Kevin Warsh to be the next Fed chair, a choice that wasn’t out of left field but did, nonetheless, surprise markets. And as Friday’s decline showed, Warsh was not the market’s first choice. There are two reasons the market was mildly disappointed by the Warsh nomination. First, he has made some less-than-supportive comments about QE (quantitative easing).
Last summer, Warsh spoke about QE being “reverse Robin Hood” in that it benefits asset holders more than non-asset holders. Specifically, Warsh thinks QE compounds inequality in the economy, and frankly, he’s likely correct. However, QE has become an integral part of the Fed’s policy, and many believe it is critical to the massive appreciation in asset prices over the past 17 years. Abandoning or altering the Fed’s reliance on QE would be a significant shift in Fed policy, and markets will want to hear from Warsh about his commitment to QE.
Second, Warsh called for “regime change” at the Fed, essentially saying that the people running the Fed (Powell, etc.) are the same people who let the inflation genie out of the bottle, and because of that, there needs to be new leadership that can restore credibility from the public. Again, that’s not necessarily a bad thing (his comments aren’t totally off base), but markets will want to hear more specificity on what exactly “regime change” means in the coming weeks.
Bottom line, markets don’t “hate” the Warsh choice, but markets view the Fed as a major ingredient of the 10+ year bull market in stocks and risk assets, so any potential change makes investors nervous, and we saw that Friday.
Does Warsh’s Nomination Jeopardize the Rally? Expectations that the Fed will keep cutting rates (even if it’s later this year) are an important support for this bull market. So, does Warsh’s nomination jeopardize that? No, it does not. Warsh is dovish on rates, and by his commentary, thinks rates should be lower than here, so this nomination should reinforce that rates are going to continue to decline.
And as long as his views on QE or Fed personnel don’t alter the market’s belief that 1) QE will be an integral part of policy like it has been in the past and 2) The Fed won’t see its staffing radically changed, then Warsh should be viewed as a dovish choice (but to embrace that, markets will want clarity on QE and Fed staffing over the coming weeks).
Source: Sevens Report 2/2/26