Analysis from Barclays indicates that the upcoming leadership transition at the Federal Reserve, with Kevin Warsh scheduled to assume the role of Chairman in May, is likely to inject fresh turbulence into U.S. stock markets, with historical precedent signaling this volatility risk. Data compiled by Alexander Altmann, Head of Global Equity Tactical Strategy at Barclays, reveals that since 1930, the S&P 500 has experienced average drawdowns of 5%, 12%, and 16% during the one-month, three-month, and six-month periods following the appointment of a new Fed Chair, respectively. The magnitude of such declines is greater than the typical peak-to-trough drops seen in the S&P 500 during any randomly selected year.
Altmann wrote in a note to clients, "While the market may be anxious about whether Mr. Warsh is perceived as 'hawkish,' the true test is more likely to arrive after May. New Federal Reserve Chairs are typically 'tested' by the stock market to some extent within their first six months in office." U.S. stocks declined last Friday following the initial announcement of President Trump's nomination of Warsh to succeed Jerome Powell, as traders viewed him as the least dovish candidate on the shortlist. Warsh previously served as a Federal Reserve Governor from 2006 to 2011.
If confirmed by the Senate, Warsh will face a market already unsettled by concerns over the Fed's independence. President Trump had previously criticized Powell on multiple occasions, asserting that he was not moving quickly enough to ease monetary policy. Although Warsh built a reputation as a hawk during his prior tenure at the central bank, he has since aligned himself with the President's stance by publicly advocating for lower interest rates.
He has also stated that the Fed should reduce its bond portfolio and reconsider its economic models. The leadership change will amplify the already considerable uncertainty surrounding the path of monetary policy. Current policy is being pulled between persistent high inflation and emerging signs of a cyclical cooling in the labor market.
Christopher Harvey, Head of Equity and Portfolio Strategy at CIBC Capital Markets, suggested that pushing for a reduction in the size of the Fed's balance sheet—a move that would drain liquidity from the financial system—could negatively impact risk assets. Conversely, Morgan Stanley's Michael Wilson wrote in a client note on Monday that Warsh's reputation as a "balance sheet hawk" might also help cool gold prices and provide modest support for the U.S. dollar, thereby "buying time for broader policy objectives to unfold as planned."
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