To The Moon

Following President Trump's announcement nominating former Federal Reserve Governor Kevin Warsh as the next Fed Chair, Wall Street's reaction has been generally subdued. For Trump, who is known for creating policy uncertainty, the market's "calm response" itself is viewed as a victory. Trump revealed the nomination decision via social media on Friday morning, having previously threatened a "system overhaul" of the Fed and criticized current Chair Powell for ignoring his demands for significant interest rate cuts to stimulate the economy. However, several portfolio managers indicated that Warsh is unlikely to cater to Trump's wishes or significantly alter the Fed's current policy stance. Market movements also reflect this cautious yet unpanicked sentiment. After the news broke, the S&P 500 index fell approximately 0.4%, and the yield on the 10-year Treasury note edged up to 4.242%. Meanwhile, gold and silver, which had recently rallied due to monetary policy uncertainty, experienced sharp pullbacks, with silver plummeting over 25%. Ed Yardeni, President and Chief Investment Strategist at Yardeni Research, described Warsh as a "solid candidate with an outstanding track record," expecting him to take a pragmatic approach. Gibson Smith, Founder of Smith Capital Investors, stated plainly, "It would be an insult to Warsh to think he would let Trump dictate interest rate policy." Warsh's policy stance is not seen by Wall Street as fitting a single label. During his tenure at the Fed, he was generally viewed as leaning hawkish, but his recent criticisms of Powell have been interpreted by some observers as dovish, creating divergence in market views on his future policy direction. Idanna Appio, Portfolio Manager for the Global Income Fund at First Eagle Investments, noted that the market widely considers Warsh one of the most hawkish candidates, but she disagrees, stating, "I still expect two to three rate cuts this year under Warsh's leadership, which isn't fundamentally different from other candidates." Warsh has long advocated for the Fed to maintain a smaller balance sheet and has criticized quantitative easing for inflating asset prices without improving wage growth. Simeon Hyman, Investment Strategist at ProShares, pointed out that if a future Chair supports lowering short-term rates while opposing suppression of long-term yields, it could lead to a further steepening of the yield curve. Anwiti Bahuguna, Global Co-Chief Investment Officer at Northern Trust Asset Management, believes that among the several candidates Trump considered, Warsh is likely the "most conventional, consensus-friendly" choice, particularly welcomed by the bond market. Analysts suggest Trump may have chosen a candidate more palatable to Wall Street due to uncertainties surrounding confirmation. Recent attacks by Trump on Powell and related Justice Department investigations have unsettled policymakers, with Senator Thom Tillis even stating he would not approve any candidate until the investigation concludes. Additionally, Trump's Supreme Court case attempting to remove Fed Governor Lisa Cook adds another variable to the situation. Jake Schurmeier, Portfolio Manager at Harbor Capital Advisors, believes Trump may hope to reduce opposition by nominating Warsh while signaling a commitment to Fed independence. However, he wryly added, "Trump will probably be complaining about Warsh again in 12 months."