Quick Thoughts: Next Fed chair—Kevin Warsh

Originally published in Stephen Dover’s LinkedIn Newsletter, Global Market Perspectives. Follow Stephen Dover on LinkedIn where he posts his thoughts and comments as well as his Global Market Perspectives newsletter.

Today, US President Trump nominated Kevin Warsh to succeed Jerome Powell as chair of the Board of Governors of the Federal Reserve (Fed). After being confirmed by the US Senate, Warsh would become chair when Powell’s term ends in May.

Below, we highlight key aspects of today’s decision and what it means for investors.

Who is Kevin Warsh?

• Warsh is a “safe pick,” who should be easily confirmed by the US Senate in our view, perhaps even with bi-partisan support (see below for details).
• Warsh has experience, having served as a governor of the Federal Reserve Board from 2006-2011. He was present for all major decisions during the global financial crisis (GFC) and therefore understands well both the everyday and crisis-management tools and role of the Fed.
• Warsh never cast a dissenting vote at Federal Open Market Committee (FOMC) meetings during  his tenure as governor. He is a team player and consensus builder.
• Like Powell, Warsh is a trained lawyer and a former investment banker with extensive experience in finance.
• Warsh has publicly supported President Trump and is a Republican.
• Warsh is not an economist. He is a skeptic about quantitative easing (QE). His views indicate some misconceptions; for example, that Fed balance sheet expansion after the GFC would boost inflation (it did not), and that the Fed needed to boost money supply to meet rising money demand (as was the case).

Confirmation process

• Warsh must now be confirmed by a simple majority in the US Senate. His confirmation may be held up in the Banking Committee by Senator Thom Tillis, who opposes the Justice Department investigation of Chair Powell. Any impasse, however, will likely be resolved.
• Warsh was confirmed by a voice vote in February 2006, with bi-partisan support. He is not a contentious pick and may receive broad support when his vote comes to the floor.

Market implications

• Warsh will enjoy the confidence of the markets. The initial reaction to his nomination was muted, with equities slightly lower and bond yields slightly higher. Warsh will initially be seen as marginally less dovish than the other candidates.
• Warsh will replace Stephen Miran on the Board of Governors, which also (marginally) tilts the balance at the FOMC in a less dovish direction.
• Warsh will have only one vote at the FOMC. As an institution, the Fed is larger than any one individual, even the chair. Warsh will be a consensus builder as regards significant changes in monetary policy, including communication strategy.
• Warsh may have more initial impact in other areas. The Fed is a critical player in financial oversight and regulation, where the Board of Governors, not the FOMC, is decisive. Warsh is philosophically aligned with Governor Bowman, who is the vice chair for supervision and leads on banking and financial oversight. Warsh will advocate for regulatory easing in areas of traditional and digital finance.
• Warsh’s probable confirmation will have little impact on Powell’s decision to remain on the Board of Governors after he steps down as chair. Powell sees the US Supreme Court decision regarding Governor Cook’s firing as critical for the Fed’s independence, and the court’s decision may determine his decision about when to leave the Fed.
• Warsh will defer to the US Treasury on the dollar (foreign exchange policy is determined by the executive branch and delegated to the Treasury Secretary), but Warsh is presumed to be an advocate of a strong dollar.

Conclusions

• Financial markets should welcome Warsh’s appointment. His confirmation process may be bumpy, but not because of questions about his qualifications.
• For investors, the focus should now shift back to where it belongs—market fundamentals and valuations. Strong corporate earnings across sectors and regions will continue to buttress a broadening of equity returns, in our view. Solid growth, underpinned by capital expenditures, will likely contribute to a steepening of yield curves. Improving returns in global equity and fixed income markets should attract investment, contributing to modest dollar weakness.