When Jerome Powell served as Federal Reserve chair, the central bank’s policy decisions were largely predictable. Powell typically telegraphed in advance what changes were likely to come. He answered questions in press conferences in a way that, at least for the most part, reassured markets.
But Powell is no longer at the helm of the Federal Reserve. He passed the baton to President Trump’s nominee, Kevin Warsh, on May 22, 2026. Warsh has called for “regime change” at the Fed. Uncertainty about what actions he might take has caused some investors to worry. Many of those concerns are almost certainly overblown. However, there’s one thing Warsh could do that would actually crash the stock market.
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Potentially problematic, but not catastrophic
Warsh could take several actions that would be potentially problematic for stocks, but not catastrophic. For example, he could be much less communicative than his predecessor. Warsh stated at the International Monetary Fund meeting last year, “The central bank should find new comfort in working without applause and without the audience at the edge of its seats.”
Investors may have to become accustomed to receiving less information about Fed moves than they have in the past. While there would likely be an adjustment period, I doubt that the stock market would tank because Warsh played things closer to the vest than his predecessors.
I don’t think changing the Fed’s preferred inflation metrics would roil markets too much either. Warsh favors using the trimmed mean inflation rate rather than the Personal Consumption Expenditures (PCE) inflation rate. The trimmed mean removes extreme outliers from the core inflation rate and uses a weighted average of the remaining items.
Warsh has been viewed as an inflation hawk throughout his career. What if he pushes for interest rate hikes to control inflation? Stocks would likely sink. However, if the rate increases were small and made incrementally, this probably wouldn’t automatically signal the beginning of a bear market or cause a crash.
Another controversial position promoted by Warsh is to drastically shrink the Fed’s balance sheet. If he moved too quickly on this front, it would spell bad news for stocks. However, markets have handled gradual quantitative tightening in the past. As long as Warsh didn’t administer too great a shock to the system, I don’t think the stock market would plunge.
The biggest mistake that Warsh could make
What could Warsh do that would almost certainly cause a stock market crash? He could undermine the Fed’s political independence. This is the fear expressed by Sen. Elizabeth Warren (D-Mass.), who said that Warsh could be President Trump’s “sock puppet.”
The president has repeatedly attacked former Fed Chair Powell for not cutting interest rates. The Justice Department even launched a criminal probe into Powell related to spending on the renovation of the Federal Reserve building.
If Warsh is viewed as making ill-advised monetary policy decisions to appease President Trump, we could see panic selling across asset classes. It’s not just that the Fed’s political independence is important (although it is). Investors know that policy changes made to satisfy political patrons often go awry.
Turkey is probably the best example of how the loss of political independence for a central bank led to disaster. President Erdogan exerted significant pressure on his country’s central bank to cut interest rates, even though inflation was high. Turkey’s bond market collapsed. Inflation skyrocketed. The country’s currency, the lira, lost a huge amount of its value.
That last point could be the canary in the coal mine if Warsh pushes the Fed to make decisions based on politics rather than sound monetary policy. If the U.S. dollar begins to sink, it could signal major trouble for the bond and stock markets.
Taking him at his word
Warsh stated at his Senate confirmation hearing that “monetary policy independence is essential.” He said that his credibility as Fed Chair is “the most important thing to the institution, and it’s the most important thing to the successful conduct of policy.”
I take Warsh at his word. He deserves the benefit of the doubt that he will uphold the Fed’s independence. It’s also important to remember that Warsh can’t implement policy changes on his own. Other Federal Reserve Governors must vote on any decisions.
A stock or bond market crash isn’t likely under Warsh’s leadership at the Fed, in my view. However, some of his moves could increase volatility. Investors should be prepared.