Is Kevin Warsh’s Fed Chair Nomination a Golden Opportunity for Stocks?

Last week, Donald Trump announced he would nominate Kevin Warsh to be the next Federal Reserve Chair, a move that surprised plenty (including us, since we thought Rick Rieder would be selected).

The market did not take the announcement well. Many attributed the selloff to Warsh’s criticism of easy-money policies and the large expansion of the money supply since 2009. More money sloshing around has found a home in stocks the last many years, which has driven the market higher.

The Fed’s holdings, for example, have grown from $1 trillion in 2007 to a peak of $9 trillion in mid-2022. Warsh believes that outside of emergencies (such as the 2008 financial crisis and COVID-19) these money-printing cycles should be out of the question once immediate danger has passed. Many believe Warsh will seek to reduce the size of the Fed’s Balance Sheet.

Following Trump’s announcement, the precious metals suffered a sharp sell-off throughout the day. Gold plunged 9% to $4,895 an ounce while silver collapsed as much as 35% midday, its largest one-day drop on record.

However, we don’t think Warsh will be nearly as hawkish as the strategists presume.

According to the Wall Street Journal, Warsh told Trump during a December 10 meeting that he supports lower interest rates. Warsh has argued that artificial intelligence and deregulation will exert downward pressure on prices over time, reducing the need to combat inflation with higher rates.

The market believes it, because it is still pricing in two more rate cuts in the U.S. later this year. Before the nomination announcement, two cuts were baked in for 2026.

Warsh’s colleague, Stanley Druckenmiller, who lobbied for his appointment, said recently that he’s seen Warsh go “both ways” on inflation depending on the economic climate.

The nomination must first pass through the Senate Banking Committee before reaching the full Senate floor for a vote. If confirmed, Warsh will be one of 12 voting members on the Federal Open Market Committee. To steer the ship in any direction, he will need to build a coalition among his peers.

We, too, believe inflation will be subdued by the further adoption of artificial intelligence. This limits any need for higher interest rates to curb inflation. For that reason, we are fully invested for our clients and continue to put new cash to work.

-written by Jeff Pollock