Guosheng Macro's Xiong Yuan: Fed Welcomes Warsh with 4 Key Takeaways (Guosheng Macro Xiong Yuan, Liu Xinyu) Source: Xiong Yuan Observation Dr. Xiong Yuan, Chief Economist at Guosheng Securities Liu Xinyu, Dai Kun, Macro Analysts at Guosheng Securities Event: On January 30th at 19:48 Beijing time, former US President Donald Trump announced on his personal social media platform Truth Social his intention to nominate Kevin Warsh as the next Chair of the Federal Reserve.
Core Conclusion: Warsh advocates for simultaneous balance sheet reduction and interest rate cuts, positioning him as more dovish than the current Chair Jerome Powell, yet more hawkish than the previously favored candidate Kevin Hassett. We reiterate that the market's current expectations for Fed rate cuts align with US economic fundamentals, but they inadequately price in the potential loss of the Federal Reserve's independence.
Kevin Warsh's nomination constitutes a surprising outcome, as the probabilities for Warsh and Riedl remained closely matched until the day before the announcement. Warsh is one of the few officials with a career spanning financial institutions, government departments, and the Federal Reserve, making him a typical Republican "establishment" elite. Notably, Warsh's father-in-law is a classmate and close friend of Donald Trump.
Regarding policy stance: Warsh advocates for concurrent quantitative tightening and interest rate cuts, making him more dovish than Chair Powell but more hawkish than the previously prominent candidate Hassett. Warsh's nomination still requires confirmation by the Senate. However, due to dissatisfaction among many Republican senators regarding the judicial investigation into Powell, the Senate confirmation process may face significant obstacles.
Following the announcement of Warsh's nomination, market expectations for Fed rate cuts have changed little; the consensus still anticipates the next cut in June, with two cuts total for the year. This stability likely stems from Warsh's relatively neutral and notably "flexible" policy stance.
Regarding market impact: In the short term, Warsh's nomination is expected to negatively affect US stocks and gold, while boosting the US dollar and US Treasury yields. Gold, in particular, faces substantial near-term correction pressure due to crowded long positions and elevated valuations. Over the medium to long term, whether Warsh can maintain policy independence remains the core variable influencing markets and requires ongoing monitoring.
Background and Policy Stance of Warsh? > Background: Kevin Warsh was born on April 13, 1970, in Albany, New York. A Republican, he graduated from Stanford University (B.A.) and Harvard University (J.D.). His career includes roles as an executive at Morgan Stanley, Special Assistant to President George W. Bush for Economic Policy and Executive Secretary of the National Economic Council, and a Governor of the Federal Reserve Board. He currently holds positions such as Visiting Scholar at the Hoover Institution, Lecturer at Stanford Graduate School of Business, and member of the Panel of Economic Advisers for the Congressional Budget Office. His diverse experience across finance, government, and the Fed marks him as a classic Republican "establishment" elite. Additionally, it is noteworthy that Warsh's father-in-law, Ronald Lauder, is the owner of the Estée Lauder Companies and was a university classmate and friend of Donald Trump. The strategic proposal to acquire Greenland was reportedly suggested by Lauder to Trump, which may have been a significant factor in Warsh ultimately securing the nomination.
> Policy Stance: Warsh believes the key to curbing inflation lies in controlling the money supply rather than raising interest rates. He argues that the Fed's Treasury purchases lead to excessive fiscal expansion, resulting in surging debt and inflation. Consequently, he advocates for the Fed to continue reducing its balance sheet while potentially implementing interest rate cuts simultaneously. Comparatively, Warsh's monetary policy stance is more dovish than current Fed Chair Powell's but more hawkish than former front-runner Kevin Hassett's. It is also important to note that during his tenure as a Fed Governor from 2006 to 2011, Warsh was a staunch hawk, opposing rate cuts and multiple rounds of Quantitative Easing (QE), ultimately resigning due to policy disagreements. However, over the past few months, his stance has shifted noticeably towards dovishness, even publicly supporting Trump's pressure on Powell, indicating a highly "flexible" policy orientation.
Was the Nomination Result a Surprise? Trading odds on the prediction market Polymarket showed that Kevin Hassett maintained a dominant probability of nomination until the end of December 2025, although Warsh's odds were gradually rising. In mid-January, Trump expressed a desire to keep Hassett within the government, causing Hassett's nomination probability to plummet and Warsh's to take a commanding lead. However, in late January, Trump remarked he was "very impressed" after interviewing Riedl, briefly causing Riedl's odds to surge past Warsh's. Until the day before the official announcement, the probabilities for Warsh and Riedl remained very close. Therefore, from this perspective, the final nomination outcome was still largely unexpected by the market.
Are There Further Uncertainties Ahead? The term of the current Fed Chair, Jerome Powell, expires on May 15th. After the President nominates a new Chair, Senate confirmation is required. This process involves an initial vote by the Senate Banking Committee, followed by a full Senate vote requiring majority approval for final confirmation. Historically, the remaining time is sufficient for the Senate to complete the voting process. However, the特殊性 of the current situation lies in the judicial investigation into Powell, which has angered many Republican senators. According to NBD data, eight Republican senators oppose the investigation into Powell, five of whom are members of the Banking Committee. One of these five, Senator Tillis, has explicitly stated he will obstruct the new Chair's nomination. The Senate Banking Committee has a partisan split of 13 Republicans to 11 Democrats. Therefore, if Tillis insists on obstruction and all Democrats vote against the nomination, a tie vote deadlock could occur. Furthermore, the full Senate has a 53-47 Republican majority. Even if Tillis relents, if more Republican senators join the opposition, the full Senate vote might also fail to achieve a majority. The timeline for concluding the investigation into Powell remains uncertain, meaning there is no clear schedule for confirming the new Chair's nomination.
In an extreme scenario where Powell's term ends before a new Chair is confirmed, an "interim Chair" would need to be selected from among the current Board of Governors. This has happened at least twice before, in 1948 (Marriner Eccles -> Thomas McCabe) and 1978 (Arthur Burns -> G. William Miller). On both occasions, the sitting Chair continued as "interim Chair" until the successor's nomination was approved, lasting approximately two and a half months and one and a half months, respectively. If this situation recurs, Powell would likely find it difficult to continue as "interim Chair," potentially leading to greater confusion in market expectations regarding Fed monetary policy.
What is the Market Impact of this Nomination? > Impact on Rate Cut Expectations: Following Warsh's nomination, market expectations for Fed rate cuts have shown little change. Interest rate futures imply probabilities below 40% for cuts in March and April, over 80% for a cut in June, and still project two cuts for the full year. The stability in expectations can be attributed to Warsh's relatively neutral policy stance and the significant divergence between his recent and earlier statements. Additionally, having been away from the Fed for many years, the market requires time to assess his current policy leanings and degree of independence. We reiterate: current market rate cut expectations align with US economic fundamentals, but they inadequately price in the risk of the Fed losing its independence. Expectations may fluctuate further as economic data is released and Warsh's stance becomes clearer.
> Impact on Major Asset Classes: After the announcement of Warsh's nomination, US stocks and Treasuries experienced volatile trading, the US dollar rallied sharply, and gold's decline accelerated. By the close on January 31st, the S&P 500, Nasdaq, and Dow Jones indices fell 0.4%, 0.9%, and 0.4% respectively. The 10-year US Treasury yield was largely unchanged at 4.24%. The US Dollar Index surged 1.0% to 97.1, while spot gold plummeted 9.3% to $4880 per ounce. Looking ahead, as Warsh's nomination was unexpected and his monetary policy stance is less dovish than other candidates, US stocks and gold are expected to remain under pressure in the short term, while the US dollar and Treasury yields are biased towards further increases. Gold is particularly vulnerable; after a sustained rally, long positions are now crowded, and its valuation measured by the gold price/US M2 ratio has reached its highest level in 40 years, suggesting significant near-term correction pressure. However, over the medium to long term, Warsh's ability to maintain monetary policy independence will be the core variable affecting markets and requires continuous monitoring. Should he demonstrate a tendency to acquiesce to Trump's demands, it could eventually become positive for US stocks and gold and negative for the US dollar, although his policy of continued balance sheet reduction might keep upward pressure on US Treasury yields.
Risk Warning: US economy and inflation, Federal Reserve monetary policy, and geopolitical conflicts exceeding expectations.
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