Podcast Summary: Thoughts on the Market – "For Better or Warsh"

Host: Andrew Sheats (A) – Global Head of Fixed Income Research, Morgan Stanley
Guest: Seth Carpenter (B) – Global Chief Economist & Head of Macro Research, Morgan Stanley
Date: February 6, 2026

Overview

This episode focuses on the nomination of Kevin Warsh as the new Federal Reserve Chair, exploring what his appointment means for monetary policy, market expectations, and challenges facing the Fed. With Seth Carpenter’s unique insider perspective, having worked for the Fed under multiple chairs, the conversation addresses how much influence a new chair has, the role of the FOMC, challenges the new chair is set to face, and the initial market and investor response.

Key Discussion Points & Insights

1. Immediate Reactions to Kevin Warsh’s Nomination

• Predictable Choice: Warsh’s name was regularly reported as a frontrunner; no shock to markets or analysts.
  • Quote: “Kevin Warsh's name was one of the names that had regularly come up when the White House was providing names of people they were considering...not a shock, right? Sort of a known quantity.” – Seth Carpenter [00:57]
• Mainstream Policy Expectations: None of the final candidates, including Warsh, were positioned as outliers in policy approach.
• Committee’s Power Over the Chair: Despite the prominence of the role, the Fed Chair is just one (albeit influential) member of a committee.
  • “The monetary policy of the Federal Reserve really is made by a committee, federal open market committee and committee matters.” – Seth Carpenter [01:35]
• Market Reaction Aligns With Continuity: Current Fed funds rate projections (~3.2%) are in line with expectations and Morgan Stanley’s own forecasts.

2. Understanding the Fed Chair’s Real Influence

• Role of the Chair: Sets meeting agendas, directs staff, frames the discussion, but must build consensus to enact change.
  • “So there's a huge amount of influence, let's say there. But in order to actually get a specific outcome, there really is a vote.” – Seth Carpenter [03:54]
• Examples from History:
  • Chairs have faced resistance and dissent: Powell, Bernanke, and Volcker all encountered significant internal opposition.
  • Volcker “reportedly threatened to quit” if unable to persuade the committee.
• Importance of Building Consensus: Chair’s power lies in persuading and uniting other committee members, not unilateral action.

3. The Challenges Facing the Fed (and Warsh)

• Uncertain Macroeconomic Environment
  • Inflation above target, high interest rates, elevated asset prices, and uncertain labor market/consumer data.
  • “Inflation is above the Fed's target. Interest rates are still elevated, certainly mortgage rates are still higher than a lot of Americans are used to...” – Andrew Sheats [05:22]
• Ambiguous Signals
  • Despite weak payroll growth, aggregate spending and capex data remain strong.
  • Ongoing government shutdown complicates the release and interpretation of labor market data.
• Productivity & AI
  • If AI boosts productivity, that could support lower inflation and thus lower rates—even with strong GDP data.
    • “So one intellectually coherent argument is...if productivity is going higher because of AI...you could easily expect that to be disinflationary.” – Seth Carpenter [07:35]
• Risks of Persistent Inflation
  • High inflation could become self-perpetuating via shifting consumer and business expectations.
    • “If inflation stays too high for too long, inflation psychology starts to change...that’s how things snowball.” – Seth Carpenter [08:40]

4. Market & Investor Reactions

• Stability Signals: Dollar strength, stable equity and credit markets, and falling metals prices all indicate investor comfort with Warsh’s orthodoxy.
  • “A good development on the back of Kevin Warsh's nomination is that the market response...has been the price action you would associate with more stability.” – Andrew Sheats [09:36]
• Divergence in Views on Policy Path:
  • Warsh has a record both of hawkishness (tighter policy) and of highlighting possible disinflation from productivity gains (potential for looser policy).
  • Investors are waiting to see Warsh’s public statements and Senate testimony for clearer signals.
• Key Questions from Clients:
  • Future stability of the US dollar.
  • The likelihood of a major policy shift under Warsh’s leadership.
  • How he will respond to unpredictable data (e.g., possible data distortions post-shutdown).

Notable Quotes & Moments

• Market Not Expecting Drastic Change:
  • “To get a substantially different outcome from what the committee would have done otherwise...I just don't see that as likely to happen because the committee can be led, can be swayed by the chair, but not to the tune of one or two percentage points.” – Seth Carpenter [02:27]
• On Fed Decision-Making:
  • “In order to actually get a specific outcome, there really is a vote...Powell took some dissents. Bernanke took a bunch of dissents. Volcker...reportedly threatened to quit if he couldn't get his way.” – Seth Carpenter [03:54]
• Framing Today's Challenges:
  • “There’s a lot of judgment going on here...That’s part of what the chair is going to have to do to try to bring the committee together in order to come to a decision.” – Seth Carpenter [07:22]

Timestamps for Key Segments

• 00:11 – Episode setup: Warsh nomination and what it means
• 00:57 – Initial reactions and context on the candidate pool
• 03:02 – Exploring the power of the Fed Chair and importance of committee
• 05:11 – Current environment challenges facing the new Chair
• 06:02 – Deep dive: macro uncertainty, inflation, productivity, and AI
• 09:31 – Investor/client reaction, market indicators, and variable expectations
• 11:36 – Closing comments and episode wrap-up

Conclusion

The episode provides a clear-eyed, nuanced view of Kevin Warsh’s nomination and its implications for U.S. monetary policy. Both Sheats and Carpenter stress the importance of consensus within the FOMC, the historical context for dissent and chair power, and the complexity of the current economic environment. The market reaction suggests comfort with continuity, but future data releases and Warsh’s initial public signals will be critical in shaping both investor and market sentiment.