NEW YORK, April 21 (Reuters) – Markets were lower on Tuesday as President Donald Trump’s candidate for the next chair of the Federal Reserve, Kevin Warsh, appeared before the U.S. Senate for a confirmation hearing.
Warsh’s appearance was being watched by investors and analysts because he has publicly questioned the Fed’s role in markets and has said he would seek to shrink the central bank’s balance sheet. Warsh promised to collaborate with the administration to keep the U.S. dollar strong while calling for “regime change” that would include a new approach to controlling inflation.
The question-and-answer session was overshadowed to some extent by news that Iran hadn’t confirmed it would attend a second round of peace talks with the U.S. — a development late in the New York morning that sent oil prices higher and short-circuited a modest rally in U.S. stock indexes.
Here are reactions to Warsh’s appearance before the Senate on Tuesday:
MARK HACKETT, CHIEF MARKET STRATEGIST, NATIONWIDE INVESTMENT MANAGEMENT GROUP, PHILADELPHIA:
“The market has been softening and rates rising through the hearing, mostly due to the discussion on quantitative easing. There has been uncertainty on which direction the Fed with head based on his previous statements. This, combined from some exhaustion from the 9% month to date rally and uncertainty around earnings season, is causing a well-earned and likely temporary pause in the equity market.”
WALTER TODD, PRESIDENT, CHIEF INVESTMENT OFFICER, GREENWOOD CAPITAL, GREENWOOD, SOUTH CAROLINA:
“It’s a lot of typical political positioning by the people asking the questions. And I think Warsh has done a pretty good job of trying to bring the conversation back to monetary policy.
“His discussion that’s happening right now around the balance sheet is very interesting, and on the surface, it may be taken as a net negative for markets if they believe he’s going to follow through. He’s talking about doing it deliberately and slowly and over many years and all these things.
“But the concept that the Fed under his leadership is going to move away from using the balance sheet as an instrument to implement policy would be quite a significant change from the framework we’ve seen since the financial crisis.”
NOEL DIXON, SENIOR MACRO STRATEGIST, STATE STREET, BOSTON:
“With Warsh, you’re going to have a dovish leaning Fed. I think there would be a coalition within the Board of Governors – (Michelle) Bowman, (Christopher) Waller, (Stephen) Miran and then Kevin Warsh and that’s four out of seven Board of Governors – that will be leaning dovish.
“There is also (John) Williams, who’s very sensitive to stock market activity. So if the markets aren’t happy with the fact that we don’t get cuts, and you get an adverse reaction in tech companies, Warsh is going to react. So there is a coalition within the Fed Board that would possibly put some cuts through, maybe a cut or two by the end of the year. I think that is still on the table.”
“The other thing that struck me was when a senator asked him if he would lower rates to 1% — I guess Trump had indicated that he would like to have rates below 2% — Warsh didn’t really say no to that. He didn’t say that it would increase prices. He kind of leaned on it and said there would be a lagged effect, and he was just very non committal to that. So it’s almost like — just reading between the lines — he’s giving himself space to maintain possible justification for rate cuts by the end of the year.”
ERIC PARNELL, CHIEF MARKET STRATEGIST AT GVA WEALTH MANAGEMENT, BERWYN, PENNSYLVANIA:
“The activity out of Washington is always worthwhile to watch because there’s a theatrical aspect to it, of course, in terms of making sure that the policy initiatives that different politicians want to express, this is their opportunity to do that.
“We’ve seen this before. We’re likely to see it again in the future. Once the positions have been established and priorities have been set in terms of congressional oversight and of the whole process and how the Fed’s going to move forward, it’s our expectations that from the middle of May that we’ll be transitioning in an orderly way to a new Fed chair.
“One of the more important things that we’ll want to watch as we go through the second half of the year is that there’s been a lot of investor questions around the independence of the Fed going forward and how the Fed’s going to handle the balance sheet as well as interest rate policy.”
THOMAS MARTIN, SENIOR PORTFOLIO MANAGER, GLOBALT INVESTMENTS, ATLANTA:
“He’s known to be opportunistic. And so if he wants the job, which, it seems like he wants the job, then you have to know that you’re going to have to say the right thing. Otherwise, you’re not going to get offered the job. So then you have to say the right thing without looking like you’re saying the right thing when you’re going to get asked about that anyway. And so he’s making his case, I guess, on other grounds, or whatever grounds he thinks are going to make sense – AI, nice candidate – that rates can be structurally lower.
“But then on the other hand, he has said that he believes the Fed needs to be independent and they need to make their own path. I don’t think anybody thinks he’s a bad choice. I mean, maybe the Democrats do. I don’t know who else they would want, but the issue is Tom Tillis is not going to vote in favor of proceeding until Trump drops the suit against the Fed and against Powell. So it’s kind of moot until there’s a resolution on that front.
“And, then after that does get resolved, then the chairman has a lot of influence, but everybody else has to vote. And they’ll be happy to tell you that they are independent and they will vote the way they want to vote. I understand that job is to build that consensus, whatever you think it might be, I’m sure that the chair thinks they have an idea of what they want it to be, and they try and move people in that direction, but I don’t know that they really can make people vote in a certain way. I think the committee is going to be fairly skeptical of Warsh anyway, as a new guy and as having a little bit moved around in his position as to what he thinks is the right thing to do.”
(Reporting by Twesha Dikshit, Lewis Krauskopf, Chibuike Oguh, Gertrude Chavez-Dreyfuss, Chuck Mikolajczak; editing by Colin Barr)
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