TradingKey - At the start of 2026, global financial markets witnessed their most significant personnel change as U.S. President Donald Trump officially nominated Kevin Warsh as the Federal Reserve next Chair. If successfully confirmed by the Senate, he will succeed Powell this May to lead the world's most influential central bank.

Upon the announcement, global markets experienced severe volatility. South Korean stocks plunged over 5%, triggering a circuit breaker. Precious metals markets suffered a crash, with gold prices plummeting more than 18%—a drop of over $1,000—within two trading days. Bitcoin has fallen more than 25% recently, dropping below $75,000. The U.S. Dollar Index rebounded briefly, while U.S. stocks showed clear divergence.

A change in Federal Reserve leadership is never merely a personnel update; it is a "bellwether" for global liquidity, the dollar's trajectory, and asset price revaluations.

Who is Warsh? Why did Trump choose him specifically? After he takes office, will the Fed's monetary policy depart from the Powell era's style? Will the dollar strengthen or weaken? Will the long-term bull market for U.S. stocks end? How should investment portfolios for 2026 be adjusted to align with these trends?

From Wall Street elite to Fed "hawkish shifter," what policy codes are hidden in Warsh's resume?

Kevin Warsh's career perfectly connects the three core domains of "Wall Street, the White House, and the Federal Reserve," making him a "triple-threat elite" in the U.S. financial world. Every stage of his experience has shaped his unique policy inclinations.

Born in 1970, Warsh spent his early years deep in Wall Street at Morgan Stanley, specializing in mergers and acquisitions. This experience gave him a keen sense of capital market logic and liquidity shifts, while allowing him to build an extensive network on Wall Street—a factor that later became one of the key reasons Trump valued him.

In 2006, Warsh reached a pivotal turning point in his career when he was nominated by former President George W. Bush to join the Federal Reserve Board of Governors. At just 36 years old, he was the youngest governor in the Fed's history at the time.

Warsh's tenure from 2006 to 2011 spanned the credit boom, the 2008 financial crisis, and the early stages of the post-crisis recovery, serving as the core phase during which his monetary policy philosophy took shape.

Then-Fed Chairman Ben Bernanke once praised him in his memoirs, noting: "Kevin’s political and market savvy and his numerous Wall Street contacts proved invaluable," highlighting his influence within the Fed.

Warsh defends the inflation bottom line and opposes quantitative easing

During his 2006–2011 tenure at the Fed, Warsh was recognized as an "inflation hardliner" and a "balance sheet hawk." At that time, to address the 2008 financial crisis, the Fed launched large-scale quantitative easing (QE) policies, releasing liquidity and stimulating economic recovery by purchasing Treasuries, but Warsh repeatedly opposed this approach publicly.

Warsh stated in public speeches that quantitative easing should only be a temporary tool for emergencies rather than a permanent policy. He argued that excessive money printing would plant the seeds of inflation and erode public purchasing power.

At the same time, Warsh advocated for rapid balance sheet tapering, believing that "the core mission of a central bank is to maintain price stability, not to subsidize the treasury or inflate asset bubbles through loose policies." Within the Fed at the time, he was a primary supporter of tighter monetary policy, voting multiple times against expanding the scale of QE to steadfastly defend the independence of central bank policy.

Supporting rate cuts and advocating for a "tapering + rate cuts" combination

In recent years, Warsh's policy stance has undergone a significant pragmatic shift, moving from a traditional inflation hawk to supporting rate cuts, even publicly aligning with Trump's calls for lower rates. This shift has brought him gradually into alignment with Trump's policy expectations.

Even more distinctive is the unique policy combination proposed by Warsh: "tapering plus rate cuts."

He believes that since September 2024, the Federal Reserve has cut interest rates by a cumulative 175 basis points, yet long-term Treasury yields have risen instead of falling. The core reason, he argues, is a decline in market trust in the Fed. Since balance sheet expansion acts as an "equivalent rate cut"—where every $1 trillion expansion is roughly equal to a 50-basis-point cut—only by "shrinking the balance sheet" can more room be created for rate cuts to achieve a genuine decline in interest rates and rebuild the Fed's policy credibility.

Furthermore, Warsh advocates for an "institutional adjustment" of the Federal Reserve, opposing an operational framework centered on models and forward guidance. He proposes that the Fed stop forecasting interest rate paths and return to a result-oriented policy model with high discretionary power.

He once stated: "The American people don't need weekly progress reports; they need stable prices. The economy cannot be reduced to a model or a machine; in a rapidly changing environment, the Fed must have sufficient autonomous space to adjust policy."

Why did Trump choose Warsh?

Before Warsh's nomination, Trump had interviewed four candidates, including Fed Governor Christopher Waller, BlackRock executive Rick Rieder, and White House economic advisor Kevin Hassett. Among them, Warsh and Hassett were the frontrunners.

Ultimately, after Trump hinted he wanted Hassett to remain in his current role, Warsh emerged as the choice. This selection was not accidental but was based on Trump's triple considerations of political demand, market confidence, and policy feasibility. It also represents a "compromise solution" to the tensions between the White House and the Fed.

Currently, Trump is at a critical political juncture with the midterm elections approaching. He urgently needs to drive economic growth and boost voter confidence through policy adjustments, with "lowering interest rates" being one of his core demands.

Warsh's policy shift in recent years, perfectly aligns with this demand. Compared to other candidates, Warsh not only explicitly supports rate cuts but also proposed the unique path of "tapering + rate cuts." This meets Trump's need for "rate cuts to stimulate the economy" while controlling inflation and rebuilding policy credibility through tapering, thus avoiding the pitfall of "dovish rate cuts triggering inflation panic."

Trump is well aware that the choice of a Fed Chair must satisfy both his own political demands and market confidence. Choosing an overly compliant dovish candidate could trigger market fears of runaway inflation, leading to dollar depreciation and capital outflows.

Selecting an overly aggressive hawk, on the other hand, would contradict his demand for rate cuts and might even trigger a recession. Warsh’s unique position—a "hawkish core with a dovish shift"—achieves exactly this balance.

Beyond the alignment of policy stances, Warsh's network of contacts and Trump's trust were also major reasons for his selection. On one hand, Warsh's years on Wall Street have built an extensive network, enabling him to better coordinate relations between the Fed and Wall Street. On the other hand, Warsh has deep personal and political ties with Trump: he served as a member of Trump's business forum, providing economic policy advice, and his father-in-law is a long-time friend of Trump.

A major shift in Fed monetary policy after Warsh takes office?

With the news of Warsh's nomination, market expectations for a shift in Fed monetary policy have grown increasingly strong.

After Warsh officially takes office, the Fed's monetary policy will undergo some substantive changes from the Powell era, but there will be no "hard-brake" style drastic adjustments. After all, the Fed's policy shifts are always constrained by inflation stickiness, economic resilience, and market reactions.

The pace of rate cuts will shift from "gradual" to front-loaded, with a focus on "the quality of rate cuts"

The Powell-era Fed always adhered to the principles of being "data-dependent, gradual, and prudent" regarding rate cuts, often waiting for economic data to confirm downward pressure before gradually starting cuts, which sometimes appeared lagging.

Once Warsh takes office, the pace of interest rate cuts will significantly accelerate, shifting from 'gradual' to 'front-loaded,' while simultaneously emphasizing the 'quality of rate cuts' over the 'quantity.'

According to forecasts from institutions such as CICC, Warsh may accelerate the pace of rate cuts in the second half of 2026, provided that 'quantitative tightening (QT) has made progress and inflation expectations are effectively anchored.'

He will not pursue 'unbounded dovish cuts' but will instead use a combination of 'QT plus rate cuts' to achieve lower interest rates while preventing a rebound in inflation.

Shifting from 'passive QT' to 'active and prudent QT,' balancing liquidity and credibility

The Powell era's Quantitative Tightening (QT) centered on 'passive QT'—gradually reducing the size of the Federal Reserve's balance sheet by allowing Treasury securities and Mortgage-Backed Securities (MBS) to mature without reinvestment. This approach minimizes market impact but is hampered by slow progress, making it difficult to quickly rebuild policy credibility.

The QT advocated by Warsh is 'active and prudent QT,' which aims to accelerate the reduction process through active asset sales while avoiding overly aggressive measures that could drain market liquidity.

Notably, Warsh's combination of 'QT plus rate cuts' is not contradictory but complementary: the primary goal of QT is to rebuild policy credibility and create room for rate cuts, while the core aim of cuts is to stimulate the economy and alleviate pressure on the housing market. Together, they avoid the inflation panic triggered by dovish cuts and the recession risks of hawkish QT, achieving the triple objective of 'stabilizing inflation, growth, and markets.'

The policy framework will move away from 'model dependence' toward being 'result-oriented,' enhancing policy flexibility.

During the Powell era, the Fed relied heavily on economic models and forward guidance, signaling policy through regular dot plots and economic projections. While this offered high transparency and guided market expectations, it lacked flexibility; sudden economic shifts often led to 'model failure' and lagging policy adjustments.

Upon taking office, Warsh will drive a fundamental shift in the Fed's framework—from 'model dependence' to being 'result-oriented.' He advocates for ending the dot plot, reducing the frequency of forward guidance, and ceasing interest rate path projections. Instead, he focuses on the actual results of 'price stability and maximum employment,' adjusting monetary policy flexibly based on real-time economic changes.

2026 Dollar Outlook: Short-term rebound, long-term dependence on policy execution.

Federal Reserve policy remains the core factor for the US dollar. Warsh’s appointment will disrupt the 'gradual depreciation' seen under Powell, potentially leading to a 'short-term rebound, medium-term volatile decline, and long-term divergence.'

In the short term, the market has clear expectations for Warsh’s 'QT plus rate cuts' combo. Enhanced credibility from QT and improved liquidity from front-loaded cuts are expected to support a stronger dollar.

As rate cuts are considered, the yield spread between the dollar and non-US currencies is unlikely to widen significantly, making it difficult to attract large-scale cross-border capital inflows.

In the medium term, as Warsh's front-loaded cuts take effect and the support from QT fades, the dollar will enter a volatile downward channel. Lower rates will reduce the dollar's appeal, driving capital out of US assets toward higher-yielding non-US assets, thereby weighing on the exchange rate.

The long-term trajectory of the US dollar will primarily depend on policy outcomes: if the 'QT plus rate cuts' successfully stabilize inflation and growth, bolstering recovery and returning inflation to the 2% target, the dollar could enter a new bull cycle. However, policy errors—such as a recession triggered by excessive QT or an inflation rebound from over-cutting—would trap the dollar in a long-term depreciation trend.

2026 Investment Strategy: NVIDIA (NVDA) , Qualcomm (QCOM) , Tesla (TSLA) worth watching

The Fed's policy shifts and dollar fluctuations under Warsh will reshape global asset pricing. For 2026, investors should align with the Fed's tempo, positioning assets around dollar trends to capture core opportunities while hedging risks, balancing short-term gains with long-term value.

Given the expected short-term dollar rebound, H1 2026 should focus on sectors benefiting from a stronger dollar, specifically 'dollar-denominated assets and industries benefiting from appreciation.' A 'tactical entry and exit' strategy is recommended over long-term holding.

Warsh’s hawkish leanings and QT expectations will weigh on precious metals long-term. A short-term dollar bounce may trigger a corrective phase in metals; investors could consider small positions in gold and silver for tactical rebounds post-correction.

A short-term dollar rally will enhance the export competitiveness of US firms. Focus on tech manufacturing, aerospace, and agricultural processing for short-term allocation in leading stocks. For instance, in tech manufacturing, Intel (INTC) , offers strong short-term elasticity amid a global semiconductor recovery; in aerospace, Boeing (BA) , is poised for a notable short-term performance driven by industry recovery, international orders, and a stronger dollar.

Sectors benefiting from rate cut expectations: Long-term allocation

As front-loaded rate cuts materialize, H2 2026 should focus on beneficiary sectors. Use a 'buy-the-dip' strategy for long-term positions to capture opportunities from policy easing.

In the growth sector, lower rates will reduce financing costs and boost profit outlooks. Tech and green energy growth stocks, previously suppressed by hikes, are set for valuation recovery. Prioritize leaders in AI, semiconductors, and energy storage.

For example, NVIDIA, the leader in AI computing, benefits from global AI scaling; lower financing costs will support its R&D and expansion. Qualcomm, focused on mobile and IoT chips, should see valuation recovery from rising industry sentiment and rate cut dividends. Tesla, a leader in EVs with significant growth in energy storage, will see reduced costs for factory construction and R&D, offering vast long-term growth potential.

Morgan Stanley issued a report warning of policy uncertainty, suggesting Warsh's hawkish stance could lead to more aggressive QT and slower rate cuts than expected. It is bullish on the dollar in the short term but bearish long term, recommending short-term Treasuries and high-quality dollar-denominated assets.

Goldman Sachs, conversely, is optimistic about Warsh's policy mix, believing 'QT plus rate cuts' can balance inflation and growth. It expects the dollar to enter a volatile phase after a short-term bounce rather than long-term depreciation, and recommends tech manufacturing and emerging market leaders.

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