Special Encore: For Better or Warsh

Summary

Thoughts on the Market: Special Encore – For Better or Warsh
Morgan Stanley | February 26, 2026
Host: Andrew Sheats, Global Head of Fixed Income Research
Guest: Seth Carpenter, Global Chief Economist and Head of Macro Research

---

Episode Overview

This special encore episode of "Thoughts on the Market" centers on the nomination of Kevin Warsh as Chair of the Federal Reserve and explores the implications for monetary policy, market reactions, and the challenges facing the institution. Andrew Sheats interviews Seth Carpenter, whose inside experience at the Fed offers crucial context on how leadership changes play out in practice, especially under turbulent economic conditions. The discussion focuses on Warsh’s expected approach, committee dynamics, policy expectations, and investor reactions.

---

Key Discussion Points and Insights

1. Initial Reactions to the Warsh Nomination

• Not a Surprise:
  Seth notes that Kevin Warsh was a frequent name in news cycles, and his eventual nomination comes as little shock to markets or insiders.

  “Kevin Warsh's name was one of the names that had regularly come up... So I think the first thing that's critically important from my perspective is not a shock, right? Sort of a known quantity.” — Seth Carpenter [01:04]

• Mainstream Policy Expectations:
  None of the final candidates, including Warsh, were considered unorthodox. Markets are unlikely to see significant changes in Fed policy direction simply due to this appointment.

  “None of them was substantially outside of what I would think of as mainstream thinking... it should keep anybody from jumping to any big conclusions that there's a huge change that's imminent.” — Seth Carpenter [01:23]

2. The Limits and Importance of the Fed Chair’s Role

• Committee Dynamics Over Individual Power:
  The Chair is powerful but ultimately leads a consensus-driven committee (the FOMC). Seth emphasizes that market forecasts for the policy rate are unlikely to be drastically upended by a new Fed chair alone.

  “The committee can be led, can be swayed by the chair, but not to the tune of one or two percentage points.” — Seth Carpenter [02:52]

• Chair’s Influence in Practice:
  Drawing from his personal experience, Seth explains that while the Chair sets the agenda, influences staff work, and steers discussions, actual policy outcomes require majority support, underlined by the reality of dissenting votes.

  “The chair convenes the meetings. The chair creates the agenda for the meeting. The chair directs the staff... But in order to actually get a specific outcome, there really is a vote.” — Seth Carpenter [03:46]

  “If we go back even further through time, Paul Volcker… reportedly threatened to quit if he couldn't get his way... The chair has to find a way to bring the committee along with the plan.” — Seth Carpenter [04:36]

3. Current Monetary Policy Challenges

• Complex Backdrop:
  Andrew outlines the tough scenario: inflation above target, elevated interest and mortgage rates, high asset prices—complicating the Chair’s mandate.

  “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 over the last several years. Asset prices are high... You could say, well, financial conditions are already quite easy, which can create some complications.” — Andrew Sheats [05:27]

• Nuanced Judgments:
  Seth describes the complexity of recent economic signals. While high inflation would traditionally call for tighter policy, the labor market’s weakness complicates the picture. Conflicting data—weak payrolls versus strong spending—require judgment from the Fed, especially as AI-driven productivity growth could potentially be disinflationary.

  “Inflation is now much higher than the committee's target... The labor market is quite weak... But if we look at aggregate spending data... it's actually pretty solid right now.” — Seth Carpenter [06:26-07:45]

  “One intellectually coherent argument is the main way you could get strong aggregate demand, strong spending numbers... but with... tepid labor force growth is if productivity is running higher. And if productivity is going higher because of AI, for example, over time you could easily expect that to be disinflationary.” — Seth Carpenter [08:10]

• Risk of Changing Inflation Psychology:
  Seth warns that persistent inflation can shift business and consumer behavior in a self-reinforcing way, complicating monetary policy responses.

  “History suggests that if inflation stays too high for too long, inflation psychology starts to change. The way businesses start to set their own prices... can get a little bit loosey goosey.” — Seth Carpenter [08:41]

4. Market and Investor Reactions

• Signaling Stability:
  Andrew observes that early market reactions—strong dollar, weaker precious metals, and steady equity/credit—suggest confidence in continuity and 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 [09:41]

• Anticipating Policy Clarity:
  Investors remain watchful for signs of whether Warsh’s tenure will feature tighter policy (given his anti-inflation rhetoric) or dovishness linked to productivity optimism. Market participants await Warsh’s public statements and confirmation hearings for clues.

  “I think that there's going to be a lot of interest when he starts to speak publicly, when we see testimony in front of the Senate.” — Andrew Sheats [10:32]

• Uncertainty Over Data and Leadership Approach:
  The upcoming months will be critical, especially with uncertainty around key inflation data due to the government shutdown. Investors are adopting a wait-and-see stance, expecting broad policy continuity in the short term.

  “There's some real uncertainty about the inflation path over the near term. In short, I think investors are going to give the benefit of the doubt for now... But I think there's a lot we're going to find out over the next couple of weeks and months.” — Andrew Sheats [11:16]

---

Notable Quotes & Memorable Moments

• On Influence of the Chair:
  “Lots of tools at their disposal, but not endless power or influence.” — Seth Carpenter [05:08]

• On Present Economic Complexity:
  “There's very much an eye of the beholder phenomenon going on here. Now, you're younger than I am. The first mortgage I had was 8.5%. I bought a house in 2000 or something like that. So by those standards, mortgage rates are actually quite low.” — Seth Carpenter [06:24]

• On Investor Perceptions:
  “Every Fed chair is different, but still more similar than different.” — Andrew Sheats [10:04]

---

Timestamps for Important Segments

• 00:18–01:23:
  Framing the significance of Warsh’s nomination; initial market and policy implications

• 02:38–03:42:
  Limits of the Chair's influence on actual policy rates; importance of FOMC consensus

• 03:42–05:18:
  Practical dynamics inside the Fed; anecdotes from Greenspan, Bernanke, Yellen, Powell, and Volcker eras

• 05:25–09:38:
  The complex macroeconomic environment; challenges of interpreting mixed economic data; implications of new technologies (AI) on productivity and inflation

• 09:38–11:43:
  Investors’ perspectives on Warsh’s nomination; early market signals; areas of uncertainty and what to watch for next

---

Tone and Language

The conversation is measured and analytical, blending real-world Fed experience with practical investor perspectives. The speakers maintain a collegial and candid tone, occasionally interjecting light humor about their own careers and generational differences in interest rate experiences.

---

Summary

The episode provides a detailed, insider-informed exploration of Kevin Warsh’s nomination as Fed chair, emphasizing both the continuity likely to prevail within committee-driven central banking and the exceptional complexity of the current macroeconomic environment. While markets have reacted with calm optimism, much hinges on how Warsh communicates and how unpredictable economic signals are interpreted in the coming months. The conversation ends on a note of watchful anticipation, encouraging listeners to follow developments closely.

Transcript

[A]

In case you missed it today, we're bringing you a special encore release of a recent episode. We'll be back tomorrow with a brand new episode. Welcome to Thoughts on the Market. I'm Andrew Sheats, Global Head of Fixed Income Research at Morgan Stanley.

[B]

And I'm Seth Carpenter, Morgan Stanley's Global Chief Economist and Head of Macro Research.

[A]

And today on the podcast, a further discussion of a new Fed Chair and the challenges they may face. It's Friday, February 6th at 1:00pm in New York. Seth, it's great to be here talking with you. And I really want to continue a conversation that listeners have been hearing on this podcast over this week about a new nominee to chair the Federal Reserve, Kevin Warsh. And you are the perfect person to talk about this. Not just because you lead our economic research and our macro research, but you've also worked at the Fed. You've seen the inner workings of this organization and what a new Fed chair is going to have to deal with. So maybe just for some broad framing, when you saw this announcement come out, what were some of the first things to go through your mind?

[B]

I will say first and foremost, 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 in lots of news cycles. So I think the first thing that's critically important from my perspective is not a shock, right? Sort of a known quantity. Second, when we think about these really important positions, there's a whole range of possible outcomes. And I would have said that of the four names that were sort of in the final set of four that we kept hearing about in the news, some differences here and there across them, but none of them was substantially outside of what I would think of as mainstream thinking. Nothing excessively unorthodox at all like that. So I think in that regard as well, I think it should keep anybody from jumping to any big conclusions that there's a huge change that's imminent. I think the other thing that's really important is the monetary policy of the Federal Reserve really is made by a committee, federal open market committee and committee matters. In these cases, the Fed has been under lots of scrutiny, under lots of pressure, depending on how you want to put it. And so as a result, there's a lot of discussion within the institution about their independence, making sure they stick very scrupulously to their congressionally given mandate of stable prices, full employment. What does that mean in practice? That means, in practice to get a substantially different outcome from what the committee would have done. Otherwise. So the market is pricing. What's the market pricing for the funds rate at the end of this year? About 3.2%.

[A]

Something about that. Yeah, yeah.

[B]

So that's a reasonable forecast. It's not too far away from our House view for us to end up with a policy rate that's substantially away from that. Call it 1 percentage point, 2 percentage points away from that. 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. I think for all those reasons, there wasn't that much surprise and there wasn't, for me, a big reason to fully reevaluate where we think the Fed's going.

[A]

Let me actually dig into that a little bit more because I know our listeners tune in every day to hear a lot about government meetings. But this is a case where that really matters because I think there can sometimes be a misperception around the power of this position. And it's both one of the most public, important positions in the world of finance, and yet, as you mentioned, it is overseeing a committee where the majority matters. Can you take us just a little bit inside those discussions? How does the Fed Chair interact with their colleagues? How do they try to convince them and persuade them to take a particular course of action?

[B]

Great question, and you're right. I spent a bunch of time there at the Fed. I started when Greenspan was chair. I worked under the Bernanke Fed. And of course for the end of that, Janet Yellen was the vice chair, so I've worked with her. Jay Powell was on the committee the whole time. So the cast of characters, quite familiar. And the process is important. So I would say a few things. The chair convenes the meetings. The chair creates the agenda for the meeting. The chair directs the staff on what the policy documents are that the committee is going to get. 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. And we only have to look back a couple weeks to the last FOMC meeting when there were two dissents against the policy decision. Dissents are not super common. They don't happen at every single meeting, but they're not unheard of by any stretch of the imagination either. And if we go back over the past few years, lots going on with inflation and how the economy was going was uncertain. Chair Powell took some dissents. If we go back to the financial crisis, Chair Bernanke took A bunch of dissents. If we go back even further through time, Paul Volcker, when he was there trying to staunch the of the high inflation of the 1970s, faced a lot of resistance within his committee and reportedly threatened to quit if he couldn't get his way and had to be very aggressive in trying to bring the committee along. So the chair has to find a way to bring the committee along with the plan that the chair wants to execute. Lots of tools at their disposal, but not endless power or influence. Does that make sense?

[A]

That makes complete sense. So maybe my final question, Seth, is this is a tough job. This is a tough job.

[B]

You mean your job and my job

[A]

or not at all? The chair of the Fed. It seems especially tricky now. 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 over the last several years. Asset prices are high. The valuation of the equity market is high. The level of credit spreads is tight. You could say, well, financial conditions are already quite easy, which can create some complications. I am sure Kevin Warsh is receiving lots of advice from lots of different angles. But if you think about what you've seen from the Fed over the years, what would be your advice to a new Fed chair and to navigate some of these challenges?

[B]

I think first and foremost you are absolutely right. This is a tough job in the best of times, and we are in some of the most difficult and difficult to understand macroeconomic times right now. Noted interest rates being high, mortgage rates being high, there's very much an eye of the beholder phenomenon going on here. Now, you're younger than I am. The first mortgage I had was 8.5%. I bought a house in 2000 or something like that. So by those standards, mortgage rates are actually quite low. So it really comes down to a little bit of what you're used to. And I think that fact translates into lots of other places. So inflation is now much higher than the committee's target. Call it 3% inflation instead core inflation on PCE rather than 2% inflation target. Now, on the one hand, that's clearly missing their target. And the Fed has been missing their target for years now. And we know that tariffs are pushing up inflation, at least for consumer goods. And Chair Powell and this committee have said they get that, they think that inflation will be temporary and so they're going to look through that inflation. So again, there's a lot of judgment going on here. The labor market is quite weak. We don't have the latest months worth of job market data because of the government shutdown, that'll be delayed by a few days. But we know that at the end of last year, non farm payrolls were running well below 50,000. Under most circumstances you would say that is a clear indication of a super weak economy. But if we look at aggregate spending data, gdp, private domestic final purchases, consumer spending, capex spending, it's actually pretty solid right now. So again, that sense of judgment, what's the signal you're going to look for? That's very, very difficult right now. And 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. So one intellectually coherent argument is the main way you could get strong aggregate demand, strong spending numbers, strong GDP numbers, but with pretty tepid labor force growth is if productivity is running higher. And if productivity is going higher because of AI, for example, over time you could easily expect that to be disinflationary. And if it's disinflationary, then you can cut interest rates now, not worry as much as you would normally about high inflation. So the result could be a lower path for policy rates. So that's one version of the argument that I suspect you're going to hear. On the other hand, inflation is high and it's been high for years. So what does that mean? Well, history suggests that if inflation stays too high for too long, inflation psychology starts to change. The way businesses start to set their own prices can get a little bit loosey goosey. They might not have to worry as much about consumers being as picky because everybody's got used to these price changes. Consumers might become less picky because, well, they're kind of sick of shopping around. They might be more willing to accept those higher prices. And that's how things snowball. And so I do think that the new chair is going to face a particularly difficult situation in leading a committee in particularly challenging times. But I've gone on for a long, long time there and one of the things that I love about getting to talk to you, Andrew, is the fact that you also talk to lots of investors all around the world. You're based in London. And so when the topic of the new Fed Chair comes up, what are the questions that you're getting from clients?

[A]

I think that there are a few questions that stand out. I think a dominant question among investors was around the stability of the US Dollar. You could say a good development on the back of Kevin Warsh's nomination is that the market Response to that has been the price action you would associate with more stability. You've seen the dollar rise, you've seen precious metals prices fall. You've seen equity markets and credit spreads be very stable. I think so far everything in the market reaction is to the point that you raised, consistent with this still being orthodox policy. Every Fed chair is different, but still more similar than different. Now, I think where it gets more divergent in client opinions is just what are we going to see from the Fed? Are we going to see a real big change in policy? I think that this is where there are very different views of Kevin Warsh from investors, some who say, well, he's in the past talked about fighting inflation more aggressively, which would imply tighter policy. And he's also talked more recently about the productivity gains from AI and how that might support lower interest rates. I think that there's going to be a lot of interest when he starts to speak publicly, when we see testimony in front of the Senate. I think the final piece, which I think, again, people do not have as fully formed an opinion on yet, is how does he lead the Fed if the data is unexpected? You mentioned inflation and Morgan Stanley has this forecast that, well, owner's equivalent rent, a really key part of inflation, might be a little bit higher than expected, which might be a distortion coming off of the government shutdown and impacts on data. But there's some real uncertainty about the inflation path over the near term. In short, I think investors are going to give the benefit of the doubt for now. I think they're going to lean more into this idea that it will be generally consistent with the Fed easing policy over time for now, generally consistent with a steeper curve for now. But I think there's a lot we're going to find out over the next couple of weeks and months.

[B]

Yeah, no, I agree with you, Andrew. I have to say I'm glad you're here in New York. It's always great to sit down and talk to you. Let's do it again before too long.

[A]

Absolutely. Seth, thanks for taking the time to talk to our audience. Thank you as always for your time. If you find thoughts of the market useful, let us know by leaving a review wherever you listen and also tell a friend or colleague about us today. The preceding content is informational only and

[B]

based on information available when created. It is not an offer or solicitation,

[A]

nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.