The announcement that former Federal Reserve Gov. Kevin Warsh will be tapped by President Donald Trump to head the central bank was greeted with some relief but some concern.
Analysts were pleased that a known quantity with bona fides was the pick, but Warsh may bring about changes in the Fed that have some concerned.
Warsh held the Fed governor post from 2006 to 2011. If confirmed by the Senate, he would replace
The choice "means uncertainty, at least initially," said Mark Malek, CIO at Siebert Financial, "and markets hate uncertainty far more than they hate high rates, low rates, or even bad data."
The uncertainty rises from "the market suddenly having to re-anchor its expectations around a Fed that might look, sound, and behave very differently from the one investors have grown used to over the past decade and a half," he said. "When regimes change, multiples wobble. When narratives change, positioning gets sloppy. That is exactly what we saw overnight."
The initial reaction saw yields rise "because the bond market, always faster on the uptake than equities, immediately priced in a lower probability of aggressive easing," Malek said.
Still, he added, "A hawkish Fed chair does not automatically mean a hostile Fed. It does not mean policy error."
If investors believe in the Fed, "they spend less time trying to front-run it and more time doing what markets are supposed to do: allocating capital based on fundamentals," Malek said." That is very good for long-term investors."
Despite the relief that Trump chose someone well-known, Chris Zaccarelli, chief investment officer at Northlight Asset Management, said the markets are concerned Warsh "won't be as dovish as they were expecting the new chair to be."
It takes time for a chair "to find his footing and establish his reputation," Zaccarelli noted, but chairmen often "end up having a different legacy and style than people (and the presidents that appointed them) had expected."
Therefore, Warsh's most important job in the role will be to "maintain (and if possible, improve) the confidence that investors have in the institution," he said.
Calling Warsh's style "brash," FHN Financial Chief Economist Chris Low said it may be difficult for him "
Low pointed to an interview last summer in which Warsh responded to a question about changing the Fed, by saying, "It's about breaking some heads, because the way they've been doing business is not working."
Warsh also said recently that "he is not a fan of compromise, that he calls things like he sees them," Low noted.
"Frankly, it will be challenging for Warsh at the Fed, where he has few friends among staff and colleagues," he said.
Still, past chairs with strong personalities "won over the staff and the FOMC by demanding excellence," Low said.
The first reaction to the nomination was "relatively cautiously favorable," and he's viewed as a "credible" choice, said James McCann, senior economist of investment strategy at Edward Jones, because of his experience with the Fed.
"He's been an independent thinker in the past who at times has taken a tough line on inflation and more recently has been more open-minded about the need for lower interest rates and stronger productivity," McCann said in a radio interview.
The markets will want policy "set appropriately," he said, calling it "a delicate balancing act."
Clients are somewhat more comfortable with Warsh than the other choices, Wells Fargo Chief Economist Tom Porcelli, senior economists Michael Pugliese and Sarah House and Economic Analyst Anagha Sridharan said in a note, adding that uncertainty remains.
Warsh hasn't been as vocal about "the economic outlook and the appropriate path for the federal funds rate" as the other finalists, they noted.
But Warsh will likely "support a more dovish stance on monetary policy driven in part by his optimism over productivity growth as well as his view of the need for lower rates to support Main Street," they said.
Still, historically Warsh has been more hawkish than the other finalists, Porcelli and the others said.
While Warsh has openly discussed the need for the central bank "to revisit some of its current governance policies and processes," they said, he also "publicly maintained a belief in the importance of central bank monetary policy independence."
How Warsh acts while Powell is still chair will be instructive, they said.
"If he is going to second guess Powell at every turn or forcibly disagree with him, he may appease his new boss, but he runs the risk of alienating himself to the rest of the Committee," Porcelli and the others said.
They praised Powell's ability to build consensus and said it will be a valuable skill for Warsh.
"The expectation is he wants to cut, perhaps even more aggressively than market pricing," they said. "If that is indeed the case, he has his work cut out for him in building a consensus toward that when the expectation of the committee at large is just for one more cut per the dots (where we think the hurdle is growing higher even for that)."
The Bond Dealers of America in a note to its members predicted "a tumultuous battle for confirmation due to the ongoing DOJ probe of current Fed Chair Powell, with Senate Banking Member Thom Tillis, R-N.C., recently stating he will vote in opposition to the nominee until the investigation is wrapped up."
The markets' response to the news was "muted," BDA said.
The choice "should calm concern about the erosion of independence of the Federal Reserve," said Eric Teal, chief investment officer at Comerica Wealth Management. "He has been flexible on monetary policy in the past and will likely take the most strategic approach toward the role of the Federal Reserve mission going forward."
Calling it "a safe pick," LPL Financial Chief Economist Jeffrey Roach, said, Warsh is "forthright, willing to rethink convention, and not necessarily a yes-man for the president."
"Warsh brings an unusual combination of hawkish instincts, openness to innovation, and deep respect for Fed independence," said Dan Siluk, head of global short duration and liquidity and portfolio manager at Janus Henderson. "His nomination suggests a policy regime that is more flexible on rates, more disciplined on the balance sheet, less communicative in its forward signaling and influenced by a structural productivity narrative shaped by AI."
Under Warsh the Fed will be "simultaneously more unpredictable and more orthodox, a blend that marks a genuine shift in the post‑crisis monetary landscape," Siluk said.
