A New Fed Chair Could Rewrite the Playbook for Markets

Today is the big day, with the Fed meeting and Kevin Warsh’s first major press conference as chair. One thing that seems likely is that Warsh will be very different from the Bernanke-Yellen-Powell lineage. Recall that Warsh resigned from the Fed before the completion of his term and was openly critical of the Fed’s use of quantitative easing.

While views can evolve over time, given the mixed legacy of QE and some of his comments during the Senate Banking Committee hearings, it would not be surprising if Warsh remains skeptical of large-scale asset purchases. More broadly, he does not appear to support maintaining an oversized balance sheet.

The FOMC press conference should help clarify several important issues today.

One would think risk assets would not respond well to a more hawkish Fed, particularly one less willing to rely on QE or balance-sheet expansion.

The first policy initiative that could potentially be eliminated, perhaps as soon as today, is the Reserve Management Purchases program that Powell introduced in December. At this point, the Fed is purchasing only about $10 billion per month in Treasury bills, and it would seem reasonable to end the program if Warsh is serious about moving away from the era of ever-expanding balance sheets.

Speaking of the balance sheet, Monday’s tax day pushed the Treasury General Account to roughly $980 billion, which should have reduced reserve balances to around $2.9 trillion. That is certainly not a disaster, but it does place reserves closer to the lower end of the range where overnight funding rates have previously come under pressure.

Meanwhile, semiconductors were hit hard, with (MU) falling more than 6%. Options activity was relatively subdued compared with recent days. If options volume continues to fade, the stock could struggle to maintain its recently elevated levels.

One reason may be that has become the market’s new shiny object now that options have been listed. If investors begin shifting their focus toward SpaceX, semiconductor stocks could face additional headwinds.

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