I have been getting tons of questions about Kevin Warsh, the president's pick to replace Jerome Powell as Fed chair. Which is interesting. Rarely do I hear from friends and neighbors to such a degree.
So clearly, there is a fair amount of anxiety out there about the president's decision. "Inflation is still too high," one lamented. And the worry is it will head even higher if the president has chosen a "yes man" who will lower interest rates simply to follow his wishes. After all, Warsh is still a mostly unfamiliar name to the broader public.
The irony is that markets are worried about the opposite--namely, Warsh's history as a hawk on interest rates and Fed policy. The dollar has popped on the announcement. Silver and platinum are plunging this morning. Palladium is down 9%. Gold is down 5%. Bitcoin is threatening to slide below $80,000!
"Will the real Kevin Warsh please stand up," joked Peter Boockvar in his reaction piece this morning. Boockvar added that the markets are reacting as if we're getting the hawkish one. But the real action, he and others note, is going to be not so much over rate cuts right now, but rather over the balance sheet. Whether we get one or two or no more rate cuts this year is somewhat of a side story.
"Warsh is viewed as being less inclined to use the Fed's balance sheet to control longer-dated interest rates," wrote BMO's Ian Lyngen. Hence a slight uptick in the 10-year Treasury yield this morning. Warsh is a longtime critic of "quantitative easing," which many argue artificially boosted equities and other asset prices, and so stocks are also trading a bit lower this morning.
But it's unlikely that anything too aggressive will happen on that front while the president is laser-focused on lowering long-term rates (and keeping stock prices high). Which leaves a third avenue for Warsh to lean heavily on: bank deregulation. This is where choosing Warsh, who may be "independent" enough that Powell leaves the Fed after all when his chairmanship is up, becomes extra crucial.
Trump needs four of the seven Fed governors to support bank deregulation, which could let banks buy up a lot more Treasuries without needing to hold more capital, which could help push longer-dated rates down. But if both Powell and Lisa Cook were to stay on, that effort could get more complicated.
All told, Warsh is seemingly all-in on the idea of lowering rates--especially longer-term rates. He would just use far more creative ways to get there.
See you at 1 p.m!
Kelly