The Fed held rates steady on Wednesday, but President Trump’s curious pick of Kevin Warsh as the next Fed Chair shifted the narrative about future monetary policy to a more hawkish path. In the FOMC, two dissenting votes in favor of a rate cut suggested a process of ongoing internal debate, but the message conveyed by outgoing Fed Chair Powell was one of order, discipline, and patience.
Economists don’t suddenly change their stripes, and if new Fed Chair Warsh winds up being as hawkish as his past record indicates, long rates will likely move higher as the Fed prioritizes controlling inflation over expanding employment as it executes on its dual mandate, which could slow the economy and impede corporate earnings growth. Additionally, the trade-off between Fed balance sheet contraction (aka quantitative tightening) and declining short term interest rates introduced a new uncertainty to Wall Street trading desks not contemplated before.The precious metals meltdown seemed driven by leverage and liquidity rather than a sudden change in fundamentals. Gold and silver, which had been the strongest performers of the year, went into free fall over the past two days.While equities and credit markets behaved orderly and without undue stress, the magnitude of the precious metals liquidation could be a harbinger of further volatility. The reaction Friday highlighted how sensitive markets remain to changes in policy, even when no immediate change is imminent. Long-duration assets fell the most, reflecting concern that a Warsh-led Fed might have to live with higher interest rates for longer.This shift carried implications beyond fixed income. Russell 1000 growth fell by -0.80% while Russell 1000 value was down just -0.24%, which if extended into next week, would be a seismic shift in sentiment. A stronger dollar tightened global financial conditions, pressured commodities, and reduced the appeal of long duration assets. For much of January, falling yields and a weaker dollar had propelled equities and commodities higher. By week’s end, that set-up had reversed.The S&P 500 and Dow Jones Industrial Average both finished the week modestly lower, while the Nasdaq ended virtually flat. Volatility remained contained, suggesting that investors viewed the policy surprise as a pivot rather than a regime shift. Still, Friday’s price action will likely serve as a reminder that markets are once again highly sensitive to changes in monetary policy, inflation, and political maneuvering, and the implications of how they all work together have not been fully flushed out.The copyright of this article belongs to the original author/organization.
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