When the White House announced that Kevin Warsh had gotten the nod and the nomination to succeed Jay Powell as Fed chair, risk markets took a step back. Evidently the "goldilocks" traders who can't tolerate anything but perfection were disappointed once again.
But those who argued that the problem with Warsh is that he's going to be an accomplice to the politicization of monetary policy missed some crucial data points. If people were really worried about the Fed becoming a rubber stamp for easy money and happy voters, they'd keep dumping the dollar for gold.
After all, that's the debasement play that revolves around eroding central bank authority to deliver the tough medicine it takes to kill inflation. We didn't actually get that on Friday. What we got was a sell signal on precious metals and a little support for short-term Treasury debt.
In the rate futures markets, the odds of deep cuts this year (more than 50 basis points total) have gone down in the past month. Anyone who tells you Warsh is eager to open the floodgates to free money needs to explain why so much institutional money reads the board the other way.
Remember, Kevin Warsh is the guy who quit the Fed back in 2010 when Ben Bernanke just couldn't wean himself away from buying Treasury bonds after the initial trauma of the 2008 crash had stabilized. Warsh hated what he saw as a sacrifice of the Fed's credibility as a shield against inflation.
"The Fed, as first responder, must strongly resist the temptation to be the ultimate rescuer," he said at the time. "No matter the congressional calendar or the pleadings of the elected, the Fed is not a repair shop for broken statutes or broken financial ecosystems."
Maybe he's changed. People change. If so, like any good economist, he needs to say how he's revised his world view to line up better with evidence and experience.
I don't think that's the case. And in that scenario, we're getting the biggest hawk since Greenspan. The Kevin Warsh we know loathes inflation and the friendly Fed facade people like Janet Yellen liked to cultivate.
Historically, he's nobody's friend. He's the tough cop, the disciplinarian dedicated to preserving the currency's purchasing power.
And that's it. Watch his hearings to see if he's even willing to relax Jay Powell's once-strict 2% inflation target. If so, yes, he's changed.
Otherwise, the dollar is getting a powerful friend. Gold and other "debasement" plays are in trouble. As for stocks, easy money may once again be a thing of the past.
