Bond Watch: what’s the market impact of Trump’s Fed chair choice?

US President Donald Trump has put forward Kevin Warsh to succeed Jerome Powell as chair of the Federal Reserve. Warsh is a former governor of the Fed (2006-11).

• Invest with ii: Investing in Bonds | Free Regular Investing | Open a SIPP

While he has yet to be confirmed by the Senate, Warsh’s appointment would come in May. However, certain senators have signalled that the outstanding criminal investigation by the Department of Justice levied against Powell regarding the renovation of department buildings should be concluded before anything progresses.

Federal Reserve policy is integral in the setting of the world’s pre-eminent “risk-free-rate” – short-term US Treasury yields – from which discount rates, leverage and risk appetites are established and, therefore, has huge implications for asset pricing.

Below, we outline Warsh’s views as a central banker, and the market implications of his nomination.

Inflation is key

Warsh historically has been perceived to have a hawkish outlook (someone more in favour of a tighter monetary policy), having repeatedly cautioned over inflationary risks, criticised market-distorting interventions such as excessive quantitative easing (QE), and decrying the risks of Fed balance sheet expansion during his last tenure on the Board of Governors of the Federal Open Market Committee (FOMC).

However, some perceive him as a more dovish influence recently, viewing productivity gains as mitigating inflation risk and being an advocate of short-term interest rate cuts.

How did markets react?

Warsh is a credible, experienced central banker, but the nomination caused a meaningful market reaction nonetheless – quite possibly for positive reasons.

• 10 funds to produce a £10,000 income in 2026
• Nine investment trusts to generate a £10,000 income in 2026

Following Warsh’s nomination, the US dollar strengthened sharply (following a Trump-related decline). Trades supported by the dollar-debasement thesis – such as heavily bought precious metals – sold off acutely. These moves point to a perception that Warsh may be a safer and more responsible pair of hands than other potential nominees in controlling inflation and preserving the value of the dollar.

On the other hand, long-dated Treasury yields also climbed. This is logical, as a central bank intent on shrinking its balance sheet removes the yield-suppressing effect of a price-insensitive buyer (the Fed) from the long end of the curve.

What are the market implications of the nomination?

The last Federal Reserve decision was a hold on rates at 3.5-3.75% citing some “stabilisation” in the unemployment rate and inflation remaining “somewhat elevated”. The “slow” rate of cuts under Powell has irked President Trump – who has made clear his intention to reduce lending rates, at a rate beyond that which Powell and the other committee members delivered.

While Trump has a clear preference for rate cuts, Warsh’s view on the necessity of independence of the Federal Reserve from the government is also well stated and will no doubt be heavily scrutinised.

In a speech called ‘An Ode to Independence’ in 2010, Warsh said: “If the Federal Reserve lost its independence, its hard-earned credibility would quickly dissipate. The costs to the economy would be incalculable: higher inflation, lower standards of living, and a currency that risks losing its reserve status.”

• Are high fees chipping away at your investment returns?
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

Regardless of Warsh’s views on the immediate trajectory of interest rates, he will be just one of the 12 voting members of the Federal Open Market Committee (FOMC). The latest FOMC dot plot shows most participants anticipating the policy rate remaining above 3% in 2026, meaning a consensus towards reducing policy rates in the near term is far from being met currently.

Still, it appears clear that there are risks of continued steepening at the long-end of the curve regardless. (For an explanation of the bond yield curve, please see below).

If the market views Warsh as bowing to the president’s pressure to ease monetary conditions – Trump has joked about suing Warsh should he fail to do so - at the expense of rekindling the now relatively under-control inflation, we can imagine that long-term yields will rise as future inflationary expectations deteriorate.

However, even if short-term rates remain elevated to counter cost pressures, Warsh’s ideological pursuit of a more normal Fed balance sheet may not provide support for prices at the long-end of the curve too.

While Warsh may bring principles, experience and a degree more certainty, duration risk remains front-of-mind when allocating to fixed income.

What is the bond yield curve?

The yield curve is a chart that plots the relationship between yields and maturity dates. 

Normally, bonds with longer lifespans such as 30 years have higher yields than shorter-duration bonds that might be just a few years away from maturity.  

However, this isn’t always the case, and the yield curve can invert, resulting in longer-term bonds trading on lower yields than short-term bonds. 

When this happens, it can reflect investor concerns about the short-term economic outlook, as they are willing to accept less income to lend for longer. 

Bond yields typically “curve” up with increasing contract length. Future inflation expectations are a big driver behind the shape of the yield curve. If inflation is expected to be higher in the years to come, yields will, in theory, rise across the curve.