Fed Chair nominee steps into the Fed’s hottest seat yet

When President Donald Trump announced his pick for the next Chair of the Federal Reserve (Fed), the decision carried far more weight than what usually surrounds such appointments. It was clear that Trump was seeking a dovish candidate, someone open to lowering rates and willing to implement changes at the central bank. Kevin Warsh fits that description and has been nominated by Trump to replace Jerome Powell.

Kevin Warsh is a former Fed governor and Wall Street veteran. His background as both a central bank insider and a market veteran means he understands the mechanics of the institution and how to navigate the personalities around the FOMC¹ table. This could make him more effective in building consensus than an outsider. Despite having recently aligned himself with arguments for lower interest rates, Warsh spent much of his earlier career warning about inflation risks and opposing what he saw as excessive monetary stimulus.

Warsh has been an outspoken critic of the size and role of the Fed’s balance sheet, which today amounts to USD 6.6 trillion. This balance sheet ballooned under the different quantitative easing programs (QE)². These programs have been beneficial for financial assets as they inject liquidity into the financial system. Warsh argues that QE and balance sheet expansions have created higher inflation, which resulted in higher yields. In line with this argumentation this means that a smaller Fed balance sheet would lead to lower policy rates and yields.

This view of a smaller balance sheet, lower rates and more classical policy tools for the Fed shares Warsh with US Treasury Secretary Bessent. The crux for investors is whether a smaller balance sheet will tighten financial conditions too much. This will not only hurt financial assets, but also jeopardize the economy.

Although the above shows that Warsh is not necessarily hawkish on interest rates, his latest statements add to this. In more recent comments he believes the potential productivity gains as a result of AI will lower inflation and drive policy rates lower.

Another plus for Warsh’s nomination is, that while he is critical of the Fed’s functioning, he does not appear to be a threat to the Fed’s independence. Something that is in full focus as Trump made no secret of his belief that rates should be lower, saying he would judge his new chair on whether they cut rates immediately.

Although Warsh has voiced criticism about how the institution operates, he is not an obvious Trump loyalist, nor does his policy record suggest he would be a vehicle for political influence, and we don’t see this nomination as a further attack on the Fed’s independence. It is also important to remember how the system is built: interest rates are set not by the chair alone, but by a twelve member committee where every member has a vote and decisions are made by majority. Any chair, no matter how influential, operates within those guardrails, and Warsh would be no exception.

Initial market moves following reports of Warsh’s nomination reflected both relief and caution since the end of last week. The dollar strengthened, while gold, silver and Bitcoin fell sharply. US equities dipped on Friday, particularly in the tech-heavy Nasdaq, but recovered some of the losses during the day. At the Sunday night open and during Asian trading, futures also plunged deep into the red, particularly on the Nasdaq, but those losses were erased over the course of the day, and US indices ultimately closed higher on Monday. In addition, interest rates fell at both the short and long ends of the curve, although the decline remained limited.

In all Warsh’s nomination narrows the uncertainty around the Fed’s future leadership and seems to uphold the Fed’s independence. This is positive. However, as Fed Chair he will not be free of the dual pressure of market expectations and a highly political backdrop.

Looking at the overall market response, we believe the drop in precious metals is not fully related to Warsh’s nomination. However, a stronger dollar, slightly lower yields and a drop in precious metals indicate part of the reversal of the ‘Sell America’ theme. In that way Warsh’s nomination is also a positive.

The implications for the longer term are less clear. Warsh seems to be dovish on rates, but the key question is if he will be hawkish on the Fed’s balance sheet. And if so, will that be negative for financial conditions? Time will tell and ABN AMRO’s investment committee will assess along the way. However, historically, new Fed chairs have been tested by the marked, so expect some volatility when the new sherif in town has arrived.