Kevin Warsh may soon take over the Fed, but his policy path is anything but clear in a market already rattled by inflation, oil, and political pressure.
KEY TAKEAWAYS
The major issue this week is not just bank earnings but the approaching leadership transition at the Federal Reserve. Jerome Powell is leaving the chairmanship, and Kevin Warsh is widely viewed as the likely replacement.
Powell can remain on the Board of Governors until 2028 and still retain a permanent policy vote. That means the transition may change the leadership dynamic without fully removing Powell from the room.
Kevin Warsh is presented as a known quantity in résumé terms but a major unknown in practical policy terms. He has a hawkish policy reputation, yet he was nominated by a president who wants lower rates.
The timing is especially difficult because the Fed is dealing with sticky core inflation, softer labor data, and oil near $100 due to disruptions around the Strait of Hormuz. Powell’s final meeting arrives with policy still constrained and the next handoff unresolved.
The main investment implication is that uncertainty itself has become a market factor. That supports caution on duration, attention to inflation hedges, and patience until the policy path becomes clearer.
MY HOT TAKES
The market is not struggling with the idea of a hawk or a dove. It is struggling with the possibility of a Fed chair who could be both politically pressured and institutionally image-conscious at the same time.
Warsh’s biggest risk to markets is not that he comes in too hot or too easy on rates. It is that nobody can confidently model how he will behave once he actually has the gavel.
This is a bad moment for a Fed leadership transition because the macro backdrop is already messy. High oil, sticky inflation, and a softening labor market leave very little room for messaging mistakes.
The banks can confirm that the financial system is still functioning, but they cannot reduce policy uncertainty. Good earnings do not solve for an unpriced regime shift at the Fed.
The cleanest message here is that uncertainty is not background noise. It is the variable investors need to manage, because markets usually punish confusion before they punish consensus.
You can quote me: “No free lunch on Wall Street.The Fed–or more specifically the Fed Chair–determines the cost of that lunch!”
Into the great unknown. US banks are all vying for the top spot in the news cycle this week as the financials report Q1 earnings. Overall, the cohort has done quite well, in part due to the volatility and uncertainty that has entrenched itself in the markets these past 6 months or so. Geopolitical strife, soaring energy costs, sticky inflation, high interest rates, a gasping labor market, and lawmakers unable to make headway on anything important. Is there anything I am missing? Oh yeah, there is AI and all the questions surrounding CAPEX, SaaS replacement, valuations, cyber security–the list goes on and on, making forming an investment thesis challenging in a group that promises the greatest sustainable growth potential in a generation.
You may be wondering why I didn’t mention the Fed. Patience–my besties. I left it for last, because it is quite possibly the most important factor–to your portfolio at least. The Fed–yes the Fed–the most powerful group of nerd-bankers the world over. They have their hands on the levers of the largest economy the world over. They ply those levers to speed up or slow down economic growth. Because of this, not only you and I, but the President himself pays special attention to them. My regulars know that one of my favorite quotes from my well-worn Wall Street Sayings notebook–there is no free lunch on Wall Street. Folks, the Fed–or more specifically the Fed Chair–determines the cost of that lunch!
Here is the challenge. The Fed is in the midst of a transition–a personnel change. Not just any rando staff economist or even Governor or Regional Bank President. No. The top spot–the corner office is about to be vacated by a beleaguered Jerome Powell, who sometime next month will pack his signed portrait of inflation fighter Paul Volcker and his grandkids into a banker’s box. He is likely to carry that box down the hall to a less conspicuous office reserved for Fed Governors. In less than a month from now, Powell will revert to being a Governor. He can legally stay in that spot until 2028, and he would have a permanent vote on policy. He will become the “Pro Tem” Chair, leading meetings, and still voting until a successor is named and duly sworn in. That successor is likely to be Kevin Warsh who has been put forward by President Trump. The world does not know much about Mr. Warsh other than the fact that he has some very strong views on how the bank should be run. On policy–I would say it's a coin toss, though many expect that he could never have been nominated by the President if he did not commit to being a dove.
Speaking of doves, they don’t seem to be as prevalent in Fed HQ as they were, say, a year ago. Of the voting members, all that’s left of them is Michele Bowman, Chris Waller, Lisa Cook, and Anna Paulson (Philadelphia). Then there is super-dove Stephen Miran. There are a handful of neutrals, including Powell, and then there are hawks Beth Hammack (Cleveland) and Lorie Logan (Dallas). There are other hawks in the room. Namely Cheryl Venable (Atlanta), Alberto Musalem (St Louis), and Jeffrey Schmid (Kansas). Fortunately they are non-voting members at the moment. According to the last poll of all those members, they collectively–on median–expect rates to be 25 basis points lower by the end of the year. However lots has happened since those projections have been submitted. The market, according to Fed Funds futures, is leaning to lower rates but assigns a very low probability of cuts by December. Looking at the March Dotplot which illustrates the FOMC’s projections, we note a pretty tight group around unchanged to slightly lower–no hikes yet. SO, the question you should be thinking about right now is, what’s next for this all-important group of policymakers in transition. With Kevin Warsh as skipper, will the Fed change meaningfully, and most importantly, how will this all impact your portfolio.
To answer that, you need to understand who Kevin Warsh actually is–not the résumé version that gets recited in Senate confirmation hearings, but the real picture. He is 55 years old, a product of Stanford Law, and he came up through Morgan Stanley before landing at the White House as a relatively young economic policy aide during the Bush administration. That path brought him to the Fed Board of Governors in 2006, where at 35 he became the youngest person ever to serve in that role. His most formative experience in that seat came fast and brutal–the financial crisis of 2008 and 2009, where he served as Ben Bernanke's primary liaison to Wall Street during the most frightening weeks in modern financial history. That experience gave him a credibility with markets that he has never fully spent, and it informs everything about how he thinks the central bank should conduct itself.
After leaving the Fed in 2011, Warsh spent fifteen years working for Stanley Druckenmiller's family office before moving to Stanford's Hoover Institution as a visiting fellow. He has been thinking, writing, and speaking about monetary policy from the outside ever since, which means unlike most nominees for this job, he comes in with a developed and public set of convictions. Chief among them is that the Fed under Powell spent too long running too loose, that its framework was flawed, and that the institution itself has allowed mission creep to erode its core mandate. He has said, in various forms, that the Fed should do less and say less–tighter in scope, more credible in action. That is a hawkish intellectual disposition by any measure.
And yet here is THE paradox that Wall Street cannot quite resolve. A man with that worldview was nominated by a President who has called his outgoing Fed Chair a moron, a numbskull, and a jerk–almost entirely because Powell would not cut rates fast enough. You do not get nominated by that President without some understanding of what is expected. The market has been trying to square that circle since the day the nomination was announced, and it has not gotten very far. Warsh has said publicly that he believes rates should come down. He has also made clear that he values his historical legacy and his institutional credibility, and that he is unlikely to simply become a rate-cutting instrument of the executive branch. Bessent himself said this week that the administration is prepared to let Warsh lead the next rate cycle on his own terms, which is either genuine deference or a very sophisticated pressure campaign dressed up as one. Probably worth remembering that there is no free lunch on Wall Street…and er, in Washington DC either.
What makes this moment especially consequential is the timing. The April 28th and 29th FOMC meeting is Powell's last as Chair, and it arrives against one of the more complicated backdrops any outgoing central banker has had to navigate. Oil is hovering near $100 dollars a barrel because the Strait of Hormuz remains substantially closed despite a ceasefire that the market initially celebrated and then quietly set aside. Core inflation is not cooperating. The labor market, while not in freefall, is softening in ways that are beginning to show up in the data more clearly. The Fed is being asked to hold a coherent policy line with one foot already out the door. Whatever Powell decides on April 29th will hand Warsh the baton–and the problem.
Here is what I think experienced investors should actually take away from all of this. The uncertainty itself is the variable. Markets can price a hawk. Markets can price a dove. What markets struggle with is a figure who has not yet been tested in the chair, inheriting a divided committee, under political pressure that has no modern precedent, in an inflationary environment being driven by a geopolitical crisis with no clear resolution date. That combination does not argue for panic–it argues for positioning. Shorter duration fixed income over longer-dated notes until the rate picture clarifies. Inflation-sensitive assets as a hedge against the scenario where Warsh holds or even tilts hawkish into energy-driven price pressure. And patience with the noise, because there will be plenty of it between now and the first meeting Warsh actually chairs.
The banks reporting this week know all of this better than anyone. Their earnings tell you the financial system is functioning. What they cannot tell you is what comes next from that corner office. That is the great unknown–and knowing that you are in it is itself a form of preparation. The investors who navigate this transition best will not be the ones who guessed Warsh's first move correctly. They will be the ones who remembered that in uncertain times, the cost of that free lunch has a way of showing up when you least expect it.
YESTERDAY’S MARKETS
Yesterday’s session extended the week's rally, with the S&P 500 gaining 0.26% to close at record levels above 7,000, the Nasdaq adding 0.36% for its 12th consecutive positive session–the longest winning streak since 2009–and the Dow up by 0.24%. The 10-year Treasury yield rose to around 4.31%, reflecting renewed caution around sticky inflation even as Iran ceasefire optimism lifted equities. Crude oil climbed more than 4% intraday, with Brent hovering near $92 per barrel as the Strait of Hormuz remained effectively closed despite the ceasefire announcement. Bank earnings continued to roll in, with results broadly solid across the financials, while Netflix dropped roughly -10% after hours on the announced departure of co-founder Reed Hastings and softer forward guidance.
NEXT UP
No major releases today, but next week will feature a torrent of important earnings along with regional Fed reports, housing numbers, Retail Sales, flash PMIs, and University of Michigan Sentiment.
Fed speakers today: Dally, Barkin, and Waller (dove, neutral, dove. 😉).
Important earnings today: Fifth Third Bancorp, Ally Financial, Truist, and State Street.