At first glance, in light of today’s nomination hearing, a ‘Warsh Fed’ looks pretty much as we expected.
In short, interest rates will again become the primary policy tool, with the balance sheet likely to take a secondary role, potentially shrinking over time too, albeit within an ‘ample reserves’ regime which may make substantial shrinkage somewhat difficult.
Meanwhile, it will also be a quieter Fed too, with Warsh & his colleagues likely to opine less in public regarding the rate path, and the economic outlook. Similarly, explicit forward guidance is likely to become much less common, with pre-commitments to policy action likely also seldom occurring.
Though details are somewhat light, it's also likely that the Summary of Economic Projections (SEP) may well be tweaked, either in its composition and/or frequency, with the ‘dot plot’ likely to be ditched, much to the delight of most market participants I expect!
On the whole, it remains likely that a ‘Warsh Fed’ will be one that is still friendly for risk assets, given an increasing focus on the supply-side of the economy, and a likely desire for a lower fed funds rate, amid expectations of an AI-induced surge in productivity.
That said, it is also likely to be a Fed which, in the short-term at least, results in higher volatility, as participants adjust to a regime where there exists substantially less visibility than we are used to, with fewer speeches, forecasts, and little by way of forward guidance.
From a trading perspective, a risk parity approach will probably work well. Expressed either through long spoos, and long front-end Treasuries, or by swapping the Treasuries leg out for a STIRs pack, either whites or reds. Adding a sprinkling of long rates vol on top of that also seems logical.
