Thoughts on the Market

Episode: The Fed’s Course Under a New Chair

Date: February 5, 2026
Hosts: Matthew Hornbach (Global Head of MacroStrategy), Michael Gapen (Chief US Economist)

Main Theme

This episode examines the outcomes and market implications of the first Federal Open Market Committee (FOMC) meeting of 2026, focusing on the Fed’s current monetary policy stance, upcoming leadership changes, and the market’s reaction to President’s nomination of Kevin Warsh as the next Fed chair.

Key Discussion Points & Insights

1. Takeaways from the January 2026 FOMC Meeting

• Policy Stance:
  • The market widely expected a pause in rate actions at this meeting.
  • The focus was on whether the pause would be “hawkish” (implying potential future tightening) or “dovish” (implying potential future easing).
  • The Fed’s communication signaled a dovish hold, maintaining an easing bias.
    • “It was clear they were going to pause. The question was would they pause or would they be on pause? …it was more of a dovish hold.” (Michael Gapen, 00:34)
  • Most data showed inflation under control and stable employment, supporting the current approach.

2. Chair Powell’s Future and DOJ Subpoena

• Uncertainty Over Powell’s Tenure:
  • Powell was noncommittal about his plans after his term as chair ends in May; he could remain as governor through 2028.
  • The Department of Justice (DOJ) issuing a subpoena complicates his calculus, possibly making it more likely he stays to address ongoing matters.
    • “He has his own reasons and that's fine. And I do think the recent subpoena by the DOJ has changed the calculus...it makes it more likely that he stays around.” (Michael Gapen, 02:07)
• Unclear Committee Composition:
  • The administration has nominated Kevin Warsh, but it's unclear whether he would replace Powell or another member, such as Stephen Myron.
  • Ongoing legal and political questions (including a Supreme Court case about removing Lisa Cook) add uncertainty to the forthcoming FOMC roster.

3. Implications of Kevin Warsh’s Nomination

• Outlook for Policy Change:
  • Warsh’s previous public remarks suggest he is broadly aligned with the current mainstream on rates—no immediate or dramatic change expected in the FOMC’s reaction function.
    • “His previous public remarks don't suggest his views on interest rate policy are substantively outside the mainstream… So we think, at least in the near term, the reaction function won't change.” (Michael Gapen, 03:57)
• Consensus-Building Nature of FOMC:
  • The Fed chair’s real influence lies in building consensus; Warsh would need broad support to alter the committee’s direction significantly.
• Balance Sheet Views:
  • Warsh is notably more hawkish on the Fed’s balance sheet, describing it as “bloated” and distortionary.
    • Reducing the balance sheet would be complex, requiring coordination with Treasury and possibly regulatory changes.
    • Any significant change here would take time—“it'll take study, it'll take patience”—and isn’t likely right away.
  • “If there is a substantive change in Fed policy going forward, it could be there on the balance sheet.” (Michael Gapen, 03:57)

4. Market Reactions to Leadership Change

• Direct Market Impact:
  • Traditional markets (interest rates, FX) reacted little; most movement occurred in prediction markets.
    • “The markets that moved the most were not the traditional…markets like interest rates or FX. The markets that moved the most were the prediction markets...” (Matthew Hornbach, 07:07)
• Communication Policy’s Role:
  • Warsh is viewed as favoring less communication from the Fed—a shift from recent policy of extensive guidance.
    • This could create more uncertainty and volatility in rates/currencies if markets need to price in more unknowns.
    • “If there is some kind of a retrenchment from the type of over-communication...that could create a bit more volatility.” (Matthew Hornbach, 07:07)
  • Investors could demand higher risk premiums, potentially resulting in a steeper Treasury yield curve.
• US vs. International Comparisons:
  • The Fed generally avoids surprising markets, unlike central banks such as the Swiss National Bank or Reserve Bank of Australia. Any change moving toward less forward guidance would be notable.
    • “The Fed has been one of the central banks that does not like to surprise the markets…” (Matthew Hornbach, 07:07)

5. Looking Ahead

• Market Awaiting More Data:
  • The next FOMC meeting (March 2026) will clarify whether the Fed will extend its pause or shift policy.
    • “We'll just have to wait between now and then to see if the Fed is on hold for a longer period of time or whether or not the data convince them to move as soon as the March meeting.” (Matthew Hornbach, ~08:22)

Timestamps for Important Segments

• 00:34: Overview of FOMC’s policy stance and “dovish hold.”
• 02:07: Discussion about Powell’s future, DOJ subpoena, and committee changes.
• 03:57: Analysis of Kevin Warsh’s nomination and outlook for Fed policy/balance sheet.
• 07:07: Breakdown of market reaction to Warsh nomination and potential implications of communication changes.
• ~08:22: Anticipation of March FOMC meeting and data dependency.

Notable Quotes

• “It was clear they were going to pause. The question was would they pause or would they be on pause? …it was more of a dovish hold.”
  — Michael Gapen (00:34)

• “I do think the recent subpoena by the DOJ has changed the calculus… it makes it more likely that he stays around.”
  — Michael Gapen (02:07)

• “His previous public remarks don't suggest his views on interest rate policy are substantively outside the mainstream… So we think, at least in the near term, the reaction function won't change.”
  — Michael Gapen (03:57)

• “If there is a substantive change in Fed policy going forward, it could be there on the balance sheet.”
  — Michael Gapen (03:57)

• “The markets that moved the most were not the traditional…markets like interest rates or FX. The markets that moved the most were the prediction markets...”
  — Matthew Hornbach (07:07)

• “If there is some kind of a retrenchment from the type of over-communication...that could create a bit more volatility.”
  — Matthew Hornbach (07:07)

Conclusion

This episode succinctly explored the FOMC’s current direction, the uncertainties surrounding its leadership transition, and how these intersect with market expectations. The consensus is that, despite headline changes, the core of monetary policy should remain steady in the near term—any meaningful shifts would likely come from changes in balance sheet policy or communication strategy over time. Market participants are advised to watch for signals at the March 2026 FOMC meeting, as the evolving Fed composition takes center stage.