What impact will the new Federal Reserve Chair have on your investments?

Maintaining the Fed’s independence

One of the biggest challenges Warsh will face will be maintaining the central bank’s independence in the wake of pressure from the White House for easier monetary policy.

Although an instrument of the US government, the Fed has long been considered an independent central bank because decisions on monetary policy are not subject to the approval of the president or any other branches of the federal government. Despite that, political pressure on the Fed is not new. In the 1960s and 1970s, for instance, President Johnson and President Nixon encouraged their Fed chairs to keep policy accommodative.

Importantly, monetary policy is set by the Federal Open Market Committee (FOMC), which is made up of all seven members of the board of governors and the 12 regional Fed presidents. However, only five regional presidents vote at a time: the president of the New York Fed and four others, who rotate through one-year voting terms. This process means there is a high level of uncertainty over the degree to which Warsh will be able to translate his monetary policy views into Fed action, as the committee is a diverse group of policymakers with independent views.

It is also worth noting that many other central banks globally remain subject to varying degrees of political pressure, and in this sense the US is not entirely unique. In a world of elevated fiscal debt globally, this dynamic is unlikely to change. The Bank of Japan has often faced suggestions – or more explicit pressure – from elected officials on the direction of monetary policy.

Supportive of lower interest rates

Despite Warsh’s tenure as a Fed Governor from 2006 to 2011 being characterised by hawkish views, driven by concerns on inflation, his more recent comments suggest a dovish view on the appropriate path of interest rates. 

Warsh anticipates an AI-driven surge in productivity which should allow for strong economic growth without generating inflationary pressure. In some respects, Warsh’s outlook echoes Alan Greenspan’s perspective in the mid-1990s, when expectations of technology-driven productivity shaped the Fed’s approach.

Where Warsh may have more hawkish views is on balance sheet policy, having previously cast doubts on the prudence of using quantitative easing (QE), citing a range of long-term negative side effects, in particular on allowing excessive government spending.

Warsh has signalled that he would seek a much more aggressive reduction of the Fed’s balance sheet – potentially even aiming to return to the pre‑Global Financial Crisis regime of scarce reserves. In our view, a balance sheet drawdown of that magnitude is unrealistic and would be difficult to implement for limited tangible benefit.

What does seem clear, however, is that a Warsh‑led Fed would be far less inclined to rely on quantitative easing in the future.

Ultimately, a more dovish monetary policy stance under Warsh is likely, given his recent comments. Nonetheless, given institutional constraints and the need for broad agreement, we would expect any changes to be gradual in nature.

Monetary policy outlook for 2026

The first challenge for any incoming policymaker is understanding the economic backdrop. The US economy entered this year on a strong footing. Year-over-year inflation rates are drifting lower, though they remain above the Fed’s 2% long-term target.

One factor making policy more complex is how the slowdown in US immigration affects labour markets. Breakeven employment is the pace of job growth required to maintain a constant unemployment rate. Recent estimates from Fed economists suggest that this breakeven level of job growth has slowed from a peak of 250,000 a month in 2023 to 30,000 in 2025. Although numerous factors have contributed to this, the slowing of net immigration in 2025 is the latest.

A simpler measure of this is the unemployment rate which, despite average monthly job losses of around 1,000 over the last six months, has remained unchanged at 4.4%.

Why Warsh’s appointment has implications for your investments

With economic growth accelerating, a dovish stance by the central bank under Warsh’s leadership strengthens our conviction in the sustainability of this acceleration.

Accelerating growth and easy monetary policy (the market is expecting one interest rate cut in the US in 2026) typically support equity markets, and lead to outperformance of cyclical equity sectors such as financials and industrials.

Bull markets – financial market conditions characterised by rising prices and optimistic investors – tend to come to an end either through economic recession or rate hikes. Today, we see accelerating growth and an incoming Fed chair that is unlikely to hike rates. You can read more about this in another recent CIO Weekly Update – Do bull markets die of old age?, if you’d like to know more.

The value of investments, and the income from them, can fall as well as rise and you may not get back what you put in. Past performance should not be taken as a guide to future performance. You should continue to hold cash for your short-term needs. This article should not be taken as advice.

Our positioning

Whilst we expect the institutional strength and integrity of the Fed to be upheld, and any policy shifts to be gradual this year, we remain underweight the US dollar, which remains expensive based on our long-term analysis. This underweight aids currency diversification in portfolios.

Our modest allocation to gold is also designed to add resilience to portfolios if Fed independence is eroded more than we anticipate.