Big Changes Are Coming to the Federal Reserve Tomorrow, and It Could Spell Trouble for Wall Street

Friday, May 15, marks Jerome Powell's last day as Federal Reserve chair, with his presumed successor, Kevin Warsh, taking over. Powell will remain on the Fed's Board of Governors until early 2028, but with Warsh at the helm, the central bank could be poised for sweeping changes.

Warsh is taking over at a particularly tricky time, as the Fed faces pressure from both surging inflation and an unstable economy. While we'll have to wait and see exactly how the new chair plans to tackle these issues, Warsh's history suggests it might not be great news for the market.

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Warsh could change the game on inflation

The Federal Open Market Committee (FOMC), the 12-person board that determines monetary policy, has set a long-term inflation target of 2%.

However, during his testimony before the Senate Banking Committee in April, Warsh explained that he plans to shift the narrative on inflation, saying, "Price stability should be a change in prices such that no one's talking about it."

While this statement is somewhat vague, it suggests that Warsh plans to shift the Fed's long-standing inflation policy. While the 2% inflation target provides an objective benchmark to measure the Fed's actions, Warsh's stance could lead to more subjective policies and greater uncertainty about inflation.

To be clear, this isn't to say that Warsh's inflation plans are right or wrong. But generally speaking, uncertainty of any kind often doesn't sit well with Wall Street.

A hawkish past could challenge the economy

Since the beginning of the Iran war in February, which has driven up gas prices and disrupted supply chains worldwide, investors have been watching the Fed closely to see how it manages interest rates.

In late March, Jerome Powell noted in a talk at Harvard University that the central bank is in a tough place. Raising interest rates could help cool rising inflation, but it can also reduce consumer spending and slow economic growth -- a particularly risky move when the unemployment rate is already elevated. For now, according to Powell, the Fed is taking a "wait and see" approach while holding interest rates steady.

Warsh, however, could change that. While serving on the Board of Governors from 2006 to 2011, he was known for being hawkish on inflation, often supporting aggressive measures to stabilize prices despite surging unemployment amid the Great Recession. Whether he'll bring that same mentality to his role as Fed chair, though, remains to be seen.

Analysts at TD Securities noted that Warsh's ideology on interest rates is "hard to pin down," expanding that although he will likely propose rate cuts in 2026, "the main question is whether his former hawkish persona makes a comeback down the road."

What should you do right now?

Keeping a long-term outlook and investing in solid stocks is more important than ever if we do face interest rate-related volatility -- which, again, is still an if at this point -- that could make markets tumble in the short term.

However, stocks with healthy underlying fundamentals are likely to thrive over time despite near-term turbulence. The more of those stocks you own, the more protected you'll be -- no matter what's on the horizon.

Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.