White House Confident Warsh Will Lead Fed in May: Rate Cut Path and Market Impact Full Analysis

TradingKey - Recent reports indicate that the White House's confidence in Kevin Warsh taking over as Federal Reserve Chair in May has significantly strengthened.

White House economic advisor Kevin Hassett stated that Warsh's confirmation hearings are expected to begin next week, while Jerome Powell may step down once the new chair is confirmed. However, Powell's departure is not yet set in stone, as he previously stated he would not leave the Fed until the conclusion of a criminal investigation into cost overruns regarding the Fed headquarters' renovation. Warsh still faces uncertainties stemming from Senate proceedings and judicial inquiries, making the confirmation process far from smooth.

This development is crucial not just because of "who will be the chair," but because the market has begun to view it as a pivot in the monetary policy framework.

What does this mean?

The Federal Reserve's policy rate currently remains in the 3.5% to 3.75% range, while Fed minutes and official remarks in recent weeks indicate that inflation, oil prices, and geopolitical conflicts are pushing rate-cut expectations further back, with some officials even reopening the door to potential future hikes.

Warsh has a clear reputation in the market as a relatively hawkish candidate, widely viewed as placing a greater emphasis on inflation control than Powell and being more cautious about balance sheet expansion.

Reuters previously noted that investors believe he might support a more simplified bank regulatory framework and maintain a more disciplined stance on the Fed's balance sheet; as a result, the market once perceived him as the type of chair who "might cut rates but would not ease policy lightly."

The problem is that today's macroeconomic backdrop does not support an "easy pivot." Fed minutes show that officials are already discussing the oil price shocks caused by the war in the Middle East and the resulting risk of a resurgence in inflation.

In response, Wall Street firms are pushing back their rate-cut expectations for 2026, with some no longer expecting any cuts this year.

This means that if Warsh officially takes office in May, he will not be facing a market waiting for easing, but rather one that has been recalibrated by oil prices and inflation.

What will be the impact on interest rates?

Hassett has publicly stated that if Warsh takes office, interest rates are more likely to be lowered because capital expenditure and productivity gains driven by AI will dampen inflation; however, whether this logic holds depends on whether oil prices, tariffs, and employment data can moderate simultaneously.

The reality is that Fed officials are already emphasizing that inflation remains "too hot," and the impacts of war and energy prices have yet to be fully reflected in the data.

Therefore, what is truly worth monitoring is not "whether Warsh will immediately pivot sharply dovish," but rather whether he will shift the policy focus back to "curbing inflation first, then discussing growth."

If this is the case, the downside for short-to-intermediate U.S. Treasury yields may be compressed, while the U.S. dollar would find easier support, especially as the market has grown more cautious regarding the number of rate cuts for the year.

For the stock market, this combination typically suggests that valuations will remain under pressure. This assessment is not mere speculation; it is consistent with recent statements from Fed officials regarding war-driven inflation, surging oil prices, and maintaining a policy stance in an "appropriate position."

Impact on Financial Markets: USD, Bonds, Gold, and Growth Stocks to React First

If Warsh is confirmed to take office in May, the market's initial reaction will typically stem not from the real economy, but from asset pricing.

In recent times, investors have viewed Warsh as a "more disciplined" candidate for Chair; once this expectation is solidified, the U.S. dollar tends to strengthen, and long-term Treasury yields may rise first as the market prices in fewer rate cuts and tighter financial conditions.

Gold and growth stocks, meanwhile, are likely to face pressure in the opposite direction.

Gold is sensitive to both real interest rates and the U.S. dollar; if the Fed prioritizes fighting inflation over supporting growth, gold's upside potential will be suppressed.

Growth stocks, particularly high-valuation tech stocks, will also be more susceptible to changes in the discount rate.

Will Fed Independence Become the Market's New Focus?

The reason this leadership change is garnering more attention than typical official appointments is that it occurs at a juncture where politics and the judiciary are intertwined.

Reuters mentioned that a judicial investigation into the renovation of Powell's headquarters, along with related injunctions and appeals, is slowing the progress of Walsh's confirmation.

Meanwhile, New York Fed President Williams has publicly emphasized that there is no vacuum in FOMC leadership; even if Walsh cannot be appointed in time, Powell can continue to chair the committee. Consequently, the market perceives a situation that is "procedurally deferrable but politically directed".

This raises a deeper issue: if the market begins to suspect that the Fed's personnel appointments are influenced by political objectives, the credibility of monetary policy will be discounted.

For the bond market, this means the term premium may find it harder to retreat; for the stock market, it means the trading logic of an "imminent Fed pivot to easing" will be forced to scale back.

If the Fed is led by someone who emphasizes inflation discipline more strongly, it might cause short-term market discomfort, but from another perspective, it could also reduce concerns about policy being swayed by external pressure. This tension is the most noteworthy aspect of the expectations surrounding Walsh's appointment.

Uncertainty remains regarding Warsh’s assumption of office in May.

At present, this matter has not yet been fully finalized; Senate procedures, judicial investigations, and whether Powell retains his seat on the Board of Governors could still alter the final pace.

However, should the White House's assessment prove correct and Warsh takes the helm of the Fed in May, the market will likely encounter a chair who places greater emphasis on inflation control, balance sheet discipline, and policy credibility. This means rate cuts will not disappear, but they may arrive later, be fewer, and remain more dependent on data confirmation.

For investors, this is not isolated news about 'who becomes chair,' but a macro turning point where discount rates for the U.S. dollar, bonds, gold, tech stocks, and financial stocks must be recalculated. What truly needs to be adapted to is not a name, but a Federal Reserve style that is more cautious and less tolerant of error.