PHOTO- Kevin M. Warsh, President Trump’s pick to lead the Federal Reserve, to prove that he can run an institution under pressure. Known as a consensus builder, skills he will need as head the Federal Reserve when President Trump is demanding rock-bottom rates. One concern is that Warsh will cut interest rates now to appease Trump even if lower rates aren’t warranted Credit…Brendan McDermid/Reuters
Wall Street’s concerns over Warsh go back to the financial crisis and because it’s just been served its least favorite thing: uncertainty.
Some investors aren’t happy with President Trump’s Federal Reserve chair nominee Kevin Warsh.
He hasn’t even been confirmed for the job, and there’s already tension in the market.
“I don’t like the pick,” Neil Dutta, chief economist at Renaissance Macro Research, wrote in a note to clients.
- Dutta tells Axios: “I don’t think people should change their investment plans around Warsh. The Fed is bigger than any one person. At the margin, Warsh represents a bit of uncertainty.”
- One concern is that Warsh will cut interest rates now to appease Trump even if lower rates aren’t warranted, which could result in the need for increases later on.
- Investors may not be changing their portfolios to prepare for Warsh, but that doesn’t mean they’re happy about his nomination.
- But for clients who have concerns, “the hedge here is to diversify internationally,” Thierry Wizman, Macquarie Group global rates and currency strategist, tells Axios.
- “Stay with U.S. growth, but you hedge out your dollar exposure,” he says, adding that this can have a bonus effect since a weaker dollar benefits earnings of multinational companies like those in the Magnificent 7.
Wall Street’s concerns over Warsh go back to the financial crisis.
- As the country entered recession in the wake of the crisis, Warsh was the only Fed governor who continued to worry about inflation, so much so that he left the job due to his disagreement with fellow members.
- “He was a member of the Fed that increased rates 17 meetings in a row which precipitated the Great Financial Crisis,” Jay Hatfield, chief investment officer at InfraCap wrote in a note to clients.
- “Because Warsh has been a policy hawk his entire life, his newfound dovishness looks very suspect,” Dutta added, which fuels uncertainty about what Warsh will do.
- How Warsh approaches AI
- He believes that AI advancement will power a productivity boom that gives the Fed room to cut interest rates without stoking inflation.
- If he keeps rates lower to account for that, tech companies may have more leeway to take on more debt to fund their AI buildouts.
- That’s good if you’re a believer that AI will make money someday. That’s bad if you’re worried about an AI bubble: Those bears would prefer a world where it’s harder for tech companies to take on more debt.
- The bottom line: Wall Street is uncomfortable because it’s just been served its least favorite thing: uncertainty.
- AXIOS
