The Big Picture

Briefing.com Summary:

*Kevin Warsh’s nomination limited market fears about political influence or loss of central bank independence.

*Markets reacted calmly, suggesting confidence policy decisions remain committee-driven, with no immediate shift in rate-cut expectations.

*Kevin Warsh will be viewed as dovish but skeptical of aggressive QE, implying a softer “Fed put” and perhaps more measured policy responses.

With the number one pick in the 2026 Fed Chair draft, the President of the United States of America selects... Kevin Warsh! And that concludes (we think) this year's Fed Chair draft.

The pre-draft combine was a buzz of activity, with close to a dozen candidates in the running to be the number one selection. Early cuts whittled that list down to five: Kevin Hassett, Christopher Waller, Michelle Bowman, Rick Rieder, and Kevin Warsh.

Then, it was four, with a fair amount of jockeying in the prediction markets as to who would get the nod. Kevin Hassett was the frontrunner for a good bit, then Kevin Warsh, then Rick Rieder up until recently, but in the end it was the candidate from "central casting" that got the nod.

Kevin Warsh, who has been a Fed Governor in the past (2006-2011), will be returning to K Street as the Chair of the Board of Governors once he is confirmed by the Senate. The markets seem to like this pick, but it is also fair to say that it hasn't been celebrated like a number one draft pick typically is.

Decision by Committee

The good news is that Kevin Warsh will be a starter from day one. He knows the offense and the defense and has been battle-tested given his tenure at the Fed during the Great Financial Crisis and the concomitant Great Recession. There won't be much of a learning curve, other than the brief time it takes to helm the FOMC meetings and conduct his press conference.

Reports suggest he is interested in being a change agent for the Fed. What that ultimately means remains to be seen, yet past comments suggest he is not a proponent of excessive quantitative easing and rock-bottom interest rates.

The latter would seemingly put him at odds with President Trump, but the market knows full well the president wouldn't have made this selection if he wasn't assured that Mr. Warsh would advocate for a lower policy rate. That said, President Trump said in a press conference that he did not ask Kevin Warsh to commit to lower rates, because that would be "inappropriate," but that he thinks Kevin Warsh will lower rates anyway.

That begs the reminder that the Fed Chair himself doesn't lower rates. It is a decision by committee, with the majority dictating the path of the policy rate. So, if Mr. Warsh is going to lower rates, he will need to be persuasive with his argument as to why the Fed should lower rates.

If things go smoothly during the confirmation process, Mr. Warsh would be Fed Chair for the June 16-17 FOMC meeting. Jerome Powell's term as Fed Chair ends in May, but he retains the right to finish his term as a Fed Governor, which ends January 31, 2028. He has not made it known yet if he will continue as a Fed Governor after his term as Fed Chair ends.

That's an interesting subplot. Another interesting subplot is that Senator Thom Tillis (R-NC), who sits on the Senate Banking Committee, has declared that he will oppose any nominee until the DOJ investigation into the Fed is concluded.

Briefing.com Analyst Insight

The market, though, seems to have concluded that the selection of Mr. Warsh is arguably the least threat to the Fed losing its independence. We say as much, knowing that, following his selection, a red-hot metals trade imploded (silver futures dropped more than 30%), that longer-dated Treasuries were little changed, that the dollar strengthened, and that stocks languished more in response to earnings news and valuation concerns than anything else.

If it was thought that Mr. Warsh would be at the Fed only to do the president's bidding, as was thought to be the case with Kevin Hassett, long-term rates likely would have risen appreciably and the dollar would have weakened.

In a certain respect, we see it as a healthy development that the stock and bond markets in particular didn't overreact to the news of Mr. Warsh's nomination. The same can be said for the fed funds futures market, which had been pricing in the likelihood of two more rate cuts before the end of the year and continues to after this news, without any big swings in the probabilities underlying those expectations.

In one sense, these markets recognize that Mr. Warsh isn't necessarily going to be doing their bidding either and that the notion of a Fed put has softened a bit given his seeming aversion to falling back on QE so readily during times of distress.

Nevertheless, if/when Kevin Warsh steps into his role as Fed Chair, he will do so carrying the label of being a "dove." That is inevitable given the president's current stance on interest rates and his desire to name a Fed Chair who favors lower interest rates.

That should placate the market for the time being, but a stronger judgment will be reserved for when Kevin Warsh takes over the starting job as the number one draft pick, who always faces exceedingly high expectations. The combine is over, training camp starts now, and the season begins in June.

--Patrick J. O'Hare, Briefing.com