A new Fed chair: how are markets responding?

On hearing the news of Kevin Warsh’s nomination to the position of Chair of the Federal Reserve, market reaction was mostly positive. The President’s manifest change of position from the more controversial Kevin Hasset to the more experienced Kevin Warsh signalled to markets that the institution of the Federal Reserve is taken seriously by the administration, further evidence that financial market performance matters for the White House.

Is the optimism warranted? By and large, we feel that this nomination, by itself, does not add fuel to the fire of doubt over the Fed’s independence. Nor, however, does it remove the risk of the world’s most important central bank compromising its independence.

Mr Warsh’s résumé is strong, to be sure. Now 55, he already has Fed institutional knowledge, as he became the youngest member of the Fed’s Board of Governors at age 35 (2006–2011). He has first-hand experience of the 2008 Global Financial Crisis, being in the room with Fed Chair Ben Bernanke and NY Fed President Timothy Geitner and has substantial exposure to Wall Street. He was also a potential candidate in 2017. He is widely regarded as a protégé of famed hedge fund manager Stanley Druckenmiller, as is Treasury Secretary Scott Bessent. If Mr Bessent is considered a “safe pair of hands”, then it stands to reason that Mr Warsh should be thought of as one too.

Mr Warsh carried a reputation as a “hawk.” Markets, aware of this reputation, initially reacted with a rebound in the U.S. dollar and a sharp sell-off in gold, which also dragged silver lower. All three trades, particularly gold and silver, were heavily overbought and primed for reversal.

However, for some time, he has aligned both his views and his criticism of the Fed with those of the U.S. President. He has frequently argued that the central bank failed to cut rates aggressively enough, claiming that artificial intelligence (AI) is structurally deflationary. He has also criticised the size of the Fed’s balance sheet, which expanded significantly during the period of quantitative easing through large-scale bond purchases. The same applies to his views on trade wars. Fifteen years ago, Mr. Warsh was a vocal critic of trade protectionism. When later asked about trade wars and their inflationary impact, arguably the opposite of AI’s effect, he chose silence. Inflation, he argued, was the Fed’s fault, not the result of tariffs. This reveals the first key point investors should understand: Mr. Warsh is a pragmatist.

This will come vary handy in the next few months, especially if he understands, just as markets do, that this candidacy is “not like the others.” Ours is a very politically polarised environment. For better or worse, right or wrong, his fight begins after the nomination. He would not, de facto, enter the Federal Reserve as a fully independent and powerful central banker, but under the suspicion that he might surrender the Fed’s independence to the US President. His prior experience speaks to his technical competence but says little about his actual ability to implement policy in an independent manner. Mr Warsh will face an uphill battle to impose his policies and to bridge the widening gap between Oval Office ambitions, entrenched Fed thinking and market realities.

Having said that, our House View is that the nomination itself doesn’t hurt the case for the Fed’s independence. If anything, appointing an institutionally experienced operator who would work closely with the Treasury but would also know his boundaries not to upset markets is a positive development.

Perhaps a more important variable in terms of the Fed’s independence is the Supreme Court’s decision regarding Lisa Cook. If the Governor is ultimately dismissed, the Fed could effectively come under presidential control.

What does it mean for businesses?

In terms of Mr Warsh, businesses should take the good news that the White House still cares about markets. However, Ms Cook’s removal and a sharp reduction of rates could be inflationary, with important consequences for businesses, in terms of pricing, valuations ahead of mergers etc.

What does it mean for investors?

Regardless of Ms Cook’s ruling, however, the long debt market is seeing risks rise: lowering rates and reducing the Fed’s balance sheet, which is Mr Warsh’s stated policy preference, risks fuelling inflation and sending long-term borrowing costs higher. Unless the AI revolution starts paying off dividends very soon and energy prices remain low, inflation is lurking. If, somehow, the Fed’s independence is additionally compromised, then the Dollar would weaken even further and long-term borrowing costs would be additionally pushed up higher.

George Lagarias – Chief Economist

Market update

US equities delivered a volatile week as markets saw heavy tech‑sector selling, driven by investor anxiety over surging AI‑related capex from software companies, combined with weak labour data showing the lowest job openings total since September 2020. This triggered a broad software‑sector unwind, with a slight recovery seen towards the end of the week, which led to US equities ending the week -0.1% lower in USD terms (+0.5% in GBP terms as the dollar strengthened). UK equities rose by +1.4%, as the Bank of England held rates steady, and outperformed relative to global tech-heavy indices. Japanese equities advanced by +2.6% as large‑cap industrials and financials drew fresh buying and global risk stabilised late‑week.

Yields on the 10‑year US Treasury fell sharply in the second half of the week, driven by the weaker‑than‑expected Job Openings and Labor Turnover Survey (lowest since September 2020) release on Thursday. Although a small rebound in the yield was seen slightly after the University of Michigan Consumer Sentiment report showed an improvement in confidence, the weekly move still concluded with a decline of -4 basis points. Despite further fluctuations around subsequent data releases, such as the Eurozone inflation report and the Bank of England’s decision to leave interest rates unchanged, the overall weekly move was modest, finishing only -1 basis point lower.

Gold saw two‑way volatility, initially pressured by USD strength, then recovering into week‑end as risk appetite improved, which kept gold elevated after the prior week’s outsized swings. Overall, gold rose +2.6%. Oil traded headline‑to‑headline around US-Iran negotiations, although it still decreased by -0.6% over the week.

Macro news

The Bank of England is expected to keep its main interest rate unchanged at 3.75% on Thursday, marking a pause in easing. In December, the Monetary Policy Committee voted 5-4 for a 0.25% cut, pointing to falling inflation and a weak labour market. The European Central Bank is also expected to keep interest rates on hold at its monetary policy meeting this week.

The Nationwide House Price Index (HPI) for January 2026 shows a slight recovery in the UK housing market, with annual house price growth rising to 1.0% from 0.6% in December. On a monthly basis, prices increased by 0.3% (seasonally adjusted), reversing a 0.4% decline seen at the end of 2025.

US Manufacturing PMI rose sharply to 52.6 (up from 47.9 in December 2025). This reading beat market forecasts of 48.5 and signifies the first expansion in the manufacturing sector since January 2025. Meanwhile, Services PMI held steady at 53.8, matching the revised December figure. This remains comfortably in expansion territory, marking the 19th consecutive month of growth for the services sector.