The Federal Reserve’s most recent meeting was a bit of a non-event. Rates stayed put in the range of 3.50 percent to 3.75 percent. The bigger Fed news is that President Donald Trump has nominated Kevin Warsh to replace Jerome Powell as chair when Powell’s term ends on May 15, 2026. (Warsh still needs Senate confirmation, but so far, that does not appear to be a big hurdle.)
Warsh previously served as a Federal Reserve governor from 2006 to 2011. He was appointed by President George W. Bush. At age 35, he was the youngest person to hold that position. He left the Fed in 2011 to join the Hoover Institution.
Compared to the other widely considered candidates, I believe Warsh was Trump’s best choice for a nomination. However, because he was also the most hawkish choice (i.e., the most likely to keep interest rates high), that does set up a tough trajectory for the stock market for the rest of 2026. The reason comes down to the gap between what the market wants and what it’s likely to get.
The 2026 setup: expectations vs. reality
The Fed’s Summary of Economic Projections (aka the “dot plot”) points to just one interest rate cut in 2026; however, investors in the federal funds futures market were expecting closer to three cuts. Under Warsh, investors may not receive those three cuts, which is a headwind for the stock market.
Prior to Warsh’s nomination, many investors feared that the stock market would crash because President Trump was eroding the Fed’s independence by insisting on rate cuts. So why didn’t it? It is because the stock market wanted those same interest rate cuts that Trump is pushing for; the risk of damage was an afterthought. The stock market expected and wanted the party associated with more rate cuts in 2026 and was willing to deal with the hangover in later years.
Warsh’s nomination does not necessarily mean no rate cuts, just fewer than what investors might have hoped for. The near-term risk for 2026 is investor disappointment. Stocks rarely reward investors when reality cannot keep up with optimism.
Who is Kevin Warsh, and how does Trump know him?
Warsh studied law at Harvard and then worked in the Bush White House, where he connected with former Fed Chair Ben Bernanke before joining the Fed.
During the 2008 financial crisis, Warsh was instrumental in establishing the Troubled Asset Relief Program (TARP). TARP forced banks and other financial companies to accept about $700 billion in relief funds because many of their CEOs feared the stigma of accepting help. Warsh and other members of the Fed, arguably, saved the U.S. economy.
Warsh is married to Jane Lauder, an heir to The Estée Lauder Companies. Her father, Ronald Lauder, is a longtime Trump friend dating back to college and a major Republican donor. That is an observation and a bit of fun trivia, not a criticism. I personally prefer to hire smart people I know over smart people I don’t know. But it does explain why Warsh has been in Trump’s orbit for years and why this nomination was not a complete surprise. But it raises the question everyone is asking: Will Warsh help preserve the Federal Reserve’s important independence? Let’s separate two things:
- Optics: Trump has publicly pressured the Fed for lower rates, and the backdrop includes a federal investigation involving Powell and Fed Governor Lisa Cook.
- Record: Warsh has spent years arguing that Fed independence is valuable and something the Fed must earn by staying in its lane.
Warsh has made the “independence case” explicitly in Fed speeches, including a notable one that strongly praised central-bank independence. The markets heard that message. The U.S. dollar has been weak in part because investors fear a weaker standard of Fed independence. When Warsh was nominated, the dollar strengthened, and precious metals fell hard. That was a likely sign that the world felt the conviction around Fed independence.
While Warsh is prepared to act in a true crisis, he seems willing to let the economy go through its natural recessionary cycles and does not seem to care about stock market crashes. That is probably a better long-term plan than constant Fed intervention, but it makes for a less pleasant stock market than we might have gotten from some of Trump’s other picks.
Warsh’s hawkish history vs. Trump’s desire for cuts
This is the part investors are trying to map. Warsh has historically been hawkish, while Trump’s preference is blunt: lower rates.
Two things can happen at once:
- Warsh has consistently criticized the Fed’s balance-sheet activism and has argued that “free money” comes with long-term costs.
- More recently, he has argued that rates should be lower, saying that productivity improvements from artificial intelligence could keep inflation down and justify lower rates. (The question is whether Warsh has really changed his long-time hawkish stance, or was that pivot par of his job interview?)
So, what does that imply for policy? Interest rate cuts may be on the way, but the “all assets levitate” version of easing is probably off the table.
As I’ve said before, my baseline scenario for the stock market this year is that it will go sideways. I have also pointed out that the chance for bigger gains is greater than the risk of losses. But no matter how the year plays out, Warsh’s appointment increases the chances of a significant pullback in 2026. What do I consider “significant”?
The S&P 500 has been flirting with 7,000 points. A decline to 6,000 points, which was its upside resistance before April 2025’s Liberation Day decline, is an obvious technical resistance level on the downside. That is about a 15 percent decline.
Investors often mention the “Fed put,” which is the belief that the Fed will intervene with supportive monetary policy to prevent major market downturns. But whenever there is a new chair, the market tends to test them. Here are the numbers for the biggest S&P 500 declines in the six months before and after each new chair took office since 1957.
Maximum S&P 500 drawdowns around new Fed chairs (since 1957):
- Arthur Burns (took office Feb. 1970): -13.5 percent before / -23.2 percent after
- G. William Miller (March 1978): -10.7 percent before / -6.0 percent after
- Paul Volcker (Aug. 1979): -5.1 percent before / -10.2 percent after
- Alan Greenspan (Aug. 1987): -7.9 percent before / -33.5 percent after
- Ben Bernanke (Feb. 2006): -5.5 percent before / -7.7 percent after
- Janet Yellen (Feb. 2014): -5.8 percent before / -4.0 percent after
- Jerome Powell (Feb. 2018): -7.8 percent before / -7.3 percent after
What those numbers mean:
- The median max drawdown in the six months before a new Chair is -7.8 percent.
- The median max drawdown in the six months after is -7.7 percent.
- The average max drawdown after is much larger (-13.1 percent) because of the 1987 outlier.
These historical tests for new Fed chairs are similar in size to my expected 15 percent decline in 2026. Here is how I see the shape of the stock market playing out this year:
- Grind sideways to slightly down through May (as markets wait on confirmation and the first real policy signals).
- A meaningful drawdown, especially if the market has to digest “two cuts, not three,” and if longer rates do not cooperate.
- A low point in the fall (October is a frequent culprit) followed by a recovery rally that closes the stock market in 2026 about where we started the year.
To reiterate, the risk to my baseline expectations is to the upside. I believe the odds of things going really well are much higher than those of things going off the rails.
In the longer term, Warsh would be a net positive for confidence in the Fed’s independence, which matters for the dollar, inflation, credibility, and the valuation multiple investors are willing to pay for U.S. assets.
