Precious metals crash, the US dollar rises! Wall Street wants to figure out: Is Walsh a friend or foe?
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On Friday, Wall Street experienced a dramatic re-pricing of assets. Faced with the prospect of former Federal Reserve Governor Kevin Warsh possibly taking over the Fed, investors were deeply conflicted: Would this new chairman be a “friend” or an “enemy” of the markets?
The market’s confusion was directly reflected in intense price volatility. On Friday, silver once plunged over 30%, marking its biggest single-day drop since March 1980; gold dropped as much as 11%, its worst daily loss since January 1980. Meanwhile, the US dollar index surged 0.9%, the 10-year Treasury yield rose to 4.24%, the S&P 500 index dipped 0.4%, and the more liquidity-sensitive small-cap Russell 2000 index fell by 1.5%.
The core trigger of this chain reaction lies in Warsh’s seemingly contradictory policy stance. On the one hand, he calls for the Fed to cut rates more quickly, while on the other, he firmly advocates for shrinking the Fed’s massive balance sheet (“quantitative tightening”).
Priya Misra, fixed income portfolio manager at J.P. Morgan Asset Management, bluntly pointed out the market’s concern: “People are reacting to his comments on reducing the balance sheet. This will have a very significant impact on risk assets.”
For the market, rate cuts are certainly positive, but if accompanied by aggressive balance sheet reduction, liquidity will be withdrawn—that is exactly the deeper logic behind Friday’s “sell-off of both safe-haven assets (gold/Treasuries) and risk assets, with only the dollar strengthening.”
The Shadow of Quantitative Tightening: Hidden Risks for Risk Assets
Wall Street’s biggest worry is about Warsh’s stance on the Fed’s balance sheet.
Warsh served as a Federal Reserve Governor from 2006 to 2011 and was known as an “inflation hawk” at the time. For years, he has believed that low rates and large-scale bond purchases fuel price increases. Although his recent remarks have shifted toward supporting faster rate cuts, his insistence on reducing the balance sheet has some investors worrying it may undercut the stimulative effect of lower rates.
At present, the Fed has just begun to expand its balance sheet again by buying short-term Treasuries to ease pressures in the overnight lending markets. If Warsh reverses this trend upon taking office, market liquidity will face a test.
Heavyweight Support: The “Pragmatist”
Despite the market’s reaction, Wall Street’s top investment circles are not universally pessimistic. Many seasoned investors believe Warsh’s greatest value lies in his “independence.” Compared with President Trump’s previous demands for a “dovish flag bearer,” Warsh is seen as capable of resisting political pressure and maintaining the central bank’s independence.
Rob Arnott, founder of Research Affiliates, said: “Warsh is a pragmatist. He will be a rational voice, which will have a calming and soothing effect on markets.”
Hedge fund titan Paul Tudor Jones also praised him highly, saying Warsh is “very market savvy.” In Jones’ view: “With debt-to-GDP above 100% and a deficit at 6%, he’s the perfect person to steer us through potential challenges.”
Pimco Chief Investment Officer Dan Ivascyn also reassured the market: “The market will be comfortable with this choice; he will show enough independence.”
Logic Reversal in the “Currency Devaluation Trade”
From the perspective of traders, Friday’s market also revealed a logic shift. The historic highs in gold and silver previously had largely reflected market distrust in the dollar and US assets (the so-called “currency devaluation trade”).
However, Warsh’s emergence has seemingly reversed that expectation. The US dollar’s strong rebound on Friday, combined with the collapse in precious metals, suggests investors are withdrawing these “no-confidence votes.” Peter Boockvar, CIO of OnePoint BFG Wealth Partners, summed up the uncertainty in this complicated mood with a play on words:
“Will the real Kevin Warsh please stand up?”
All of the market’s current volatility is, in essence, bets on “who is the real Kevin Warsh.” His policy stance is complex and elusive: once a well-known “inflation hawk,” he now calls for rate cuts, but remains fixated on quantitative tightening. Such complexity makes any simple “hawk” or “dove” label seem entirely inadequate.
It is worth noting that even if Warsh takes office, he cannot make policy alone.
Though the Fed chair has enormous influence, decisions are still subject to the committee’s voting mechanism. There is already internal dissension at the Fed: this week, the FOMC voted to keep rates unchanged, but two Trump-appointed governors, Waller and Milan, dissented and supported a 0.25 percentage point cut.
Some investors point out that if the US were to have frequent splits between the central bank head and the committee on rates, as the UK does, this would mark a significant change and could put pressure on the market by increasing future policy uncertainty.
Clearly, Wall Street still needs more time to digest the complex signals brought by this potential new chairman.
Risk Disclaimer and Legal NoticeThe market carries risks; investments should be made prudently. This article does not constitute personal investment advice and does not take into account the special investment goals, financial situations, or needs of individual users. Users should consider whether any opinions, views, or conclusions herein are consistent with their individual circumstances. Invest accordingly at your own risk.
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