According to a report from Wedbush, the investment bank suggests that US stock markets could enter a period of volatility in the coming months as investors brace for a potential comprehensive policy overhaul under the leadership of Kevin Warsh at the Federal Reserve. In a report released on February 1, titled "Farewell to the Fed Put," Wedbush analyst Sam Basham noted that former President Trump's selection of Warsh as the next Fed Chair is likely to unsettle markets in the near term, until the policy outlook becomes clearer later this year. The firm anticipates that market volatility will persist until Warsh officially takes office in May, as investors begin to price in what is perceived as a decisive break from the policy framework of the Powell era. Wedbush believes that under Warsh's leadership, the Fed's focus will shift from interest rates to the size of the central bank's balance sheet. Under a framework the firm terms "practical monetarism," the Fed would use money supply, rather than policy rates, as its primary tool to combat inflation, draining liquidity via quantitative tightening and shrinking its roughly $6.5 trillion balance sheet. This shift would mark the "end of the Fed put," the report states, terminating the market's assumption that the central bank will routinely intervene to support markets outside of genuine crises. Wedbush warns that this approach could be unfavorable for risk assets reliant on excess liquidity, while benefiting US Treasuries and the dollar, and putting pressure on gold and silver. The firm expects the transition period to be bumpy. Between now and May, if negative momentum builds, Wedbush sees "downside risks outweighing upside risks" for equities, as investors reassess high-beta exposures and pivot towards companies with durable, genuine growth capabilities. The report also highlighted Warsh's long-standing skepticism towards large-scale asset purchases, mentioning his 2011 resignation from the Fed in opposition to the second round of quantitative easing. Citing Warsh's views, Wedbush stated that the Fed relies on outdated inflation models, failing to recognize the role of productivity gains and instead viewing economic growth itself as an inflationary factor. Over time, Wedbush suggests that a successful shift towards stricter liquidity control could help anchor inflation expectations, support long-term rates, and ultimately have a constructive impact on markets. In the short term, however, the firm cautions investors to prepare for a repricing of volatility, as the era of "guaranteed liquidity support" draws to a close. Last Friday, former President Trump nominated former Fed Governor Kevin Warsh to be the next Chair of the Federal Reserve. Trump's nomination is subject to Senate approval. Notably, the process could face delays if Republican Senator Thom Tillis of North Carolina maintains his stance to block any Fed nominations until the Justice Department completes an investigation into current Chair Jerome Powell. As a former Fed governor with a multifaceted career spanning Wall Street and the White House, Warsh's nomination not only signals a potential ideological shift in US monetary policy but is also poised to profoundly impact American consumers, financial markets, and the global economy. Reviewing Warsh's career, his extensive experience in key roles underpins his qualification for the position of Fed Chair. In 2006, Warsh was nominated by former President George W. Bush to serve on the Federal Reserve Board, where he remained as a Governor until 2011, becoming one of the youngest members in the institution's history. He was fully involved in designing emergency rescue policies during the global financial crisis, including emergency lending programs to stabilize credit markets and coordination related to the Troubled Asset Relief Program (TARP), gaining practical experience in managing complex economic crises. Furthermore, a graduate of Stanford University with a law degree from Harvard, he previously worked in investment banking at Morgan Stanley and served as a Special Assistant to the President for Economic Policy, combining academic depth, financial practical experience, and policy-making perspective. Trump's nomination directly targets his core policy objective—pushing for significant interest rate cuts. In his nomination statement, Trump praised Warsh as "fully meeting the ideal candidate criteria and certainly not disappointing," reflecting expectations for Warsh to promote accommodative monetary policy. It is understood that Warsh's stance is relatively hawkish, and he tends to favor maintaining the Fed's independence, an expectation that has dampened market anticipation for looser Fed monetary policy. Additionally, Warsh is a staunch supporter of the Fed reducing its balance sheet. In numerous speeches over the past year, Warsh has repeatedly stated that the Fed's aggressive bond-buying programs over the years have gone too far and risk dragging it into the messy politics of fiscal policy. Some market participants have warned that Warsh's inclination might be to trade accelerated balance sheet reduction for rate cuts, creating a unique policy mix unfavorable for liquidity expansion in stock and bond markets. From a policy expectation standpoint, Warsh's nomination is expected to break from the "pragmatic, consensus-driven" monetary policy framework of the Powell era, shifting towards a greater emphasis on inflation control and policy independence. Although Trump expects him to push for aggressive rate cuts, Warsh's policy stance exhibits distinct characteristics of a "hawkish core combined with pragmatic flexibility." As a public critic of Fed policy in the post-financial crisis era, Warsh has warned that massive asset purchases and near-zero interest rates distort markets and undermine long-term price stability, having voted against the second round of quantitative easing. He has frequently criticized the Fed for "mission creep," called for "institutional change," and argued that the current Fed policy framework suffers from a credibility deficit. This implies that, compared to Powell, Warsh has lower tolerance for inflation and may be more inclined to use policy tightening to guard against inflation risks, rather than simply accommodating short-term economic stimulus demands. However, market analysis generally views Warsh as not being a rigid ideological hawk. Krishna Guha, Head of Global Policy and Central Bank Strategy at Evercore ISI, pointed out that Warsh's hawkish reputation and independent image could make it easier to build consensus within the Federal Open Market Committee (FOMC), potentially facilitating 2-3 rate cuts this year, addressing government desires while balancing inflation control objectives. Tobin Marcus, an expert at Wolfe Research, predicts that Warsh might agree with the policy logic that "productivity growth supports looser interest rates," but final decisions will still be constrained by economic data, unlikely to completely depart from the Fed's traditional "data-dependent" framework.
Comments