Written by: Long Yue, Wall Street Insights

On Friday, Wall Street experienced a thrilling revaluation of assets.

Faced with the prospect of former Federal Reserve Governor Kevin Warsh possibly leading the Fed, investors found themselves in deep turmoil: is this new chairman a "friend" or "foe" to the market?

The market's confusion was directly reflected in the dramatic price fluctuations. On Friday, silver briefly fell over 30%, marking the largest single-day drop since March 1980; gold dropped 11% at one point, the worst day since January 1980. Meanwhile, the dollar index surged 0.9%, the yield on 10-year U.S. Treasuries rose to 4.24%, the S&P 500 index dipped 0.4%, while the more liquidity-sensitive small-cap Russell 2000 index fell 1.5%.

The core of this chain reaction lies in Warsh's seemingly contradictory policy stance. On one hand, he calls for the Fed to cut interest rates more quickly, while on the other hand, he firmly advocates for reducing the Fed's massive balance sheet (i.e., "balance sheet reduction").

Priya Misra, a fixed income portfolio manager at JPMorgan Asset Management, candidly pointed out the market's concerns: "People are reacting to his comments about the balance sheet needing to shrink. This will have a very significant impact on risk assets."

For the market, while interest rate cuts are certainly a positive, if accompanied by aggressive balance sheet reduction, liquidity will be drained. This is the deep logic behind Friday's market performance, where "safe-haven assets (gold/U.S. Treasuries) were hit hard alongside risk assets, with only the dollar strengthening."

The Shadow of Balance Sheet Reduction: Concerns for Risk Assets

Wall Street's biggest worry is Warsh's attitude towards the Fed's balance sheet.

Warsh served as a Fed governor from 2006 to 2011, during which he was known as an "inflation hawk," believing for years that low interest rates and large-scale bond purchases would fuel rising prices. Although his recent comments have shifted towards supporting quicker rate cuts, his insistence on reducing the balance sheet has led some investors to believe this could undermine the stimulative effects of rate cuts.

Currently, the Fed has just begun to expand its balance sheet again by purchasing short-term government bonds to alleviate pressure in the overnight lending market. If Warsh reverses this trend upon taking office, market liquidity will face a test.

Support from Big Names: He is a "Pragmatist"

Despite the market voting with its feet, the top investment circles on Wall Street have not uniformly turned bearish. Many seasoned investors believe Warsh's greatest value lies in his "independence." Compared to the "loose monetary flagbearer" previously sought by President Trump, Warsh is seen as a suitable candidate who can withstand political pressure and maintain central bank independence.

Rob Arnott, founder of Research Affiliates, stated: "Warsh is a pragmatist. He will be a voice of reason, which will have a calming and soothing effect on the market."

Hedge fund mogul Paul Tudor Jones praised him, calling Warsh "very market savvy." Jones believes: "In a context where debt exceeds 100% of GDP and the deficit rate is at 6%, he is the perfect person to guide us through potential challenging times."

Pimco's Chief Investment Officer Dan Ivascyn also reassured the market, saying: "The market will feel comfortable with this choice; he will demonstrate sufficient independence."

The Logic Reversal of "Currency Depreciation Trade"

From a trader's perspective, Friday's market also revealed a shift in logic. The previous historical highs in gold and silver largely reflected the market's loss of confidence in the dollar and U.S. assets (i.e., the "currency depreciation trade").

However, Warsh's emergence seems to have reversed this expectation. The strong rebound of the dollar on Friday, coupled with the collapse of precious metals, suggests that investors are retracting this "vote of distrust." Peter Boockvar, Chief Investment Officer of OnePoint BFG Wealth Partners, summarized the uncertainty under this complex sentiment with a pun:

"Will the real Kevin Warsh please stand up?"

All current market fluctuations are essentially betting on "who is the real Kevin Warsh." His policy stance is complex and difficult to discern: he was once a well-known "inflation hawk," recently shifted to calling for rate cuts, yet has always been fixated on balance sheet reduction. This complexity renders any simple "dovish" or "hawkish" label inadequate.

It is worth noting that even if Warsh takes office, he cannot unilaterally set policy.

While the Fed chair wields significant influence, he is still bound by the committee's voting mechanism. Currently, there are already divisions within the Fed; this week, the Federal Open Market Committee (FOMC) voted to keep interest rates unchanged, but the two governors appointed by Trump, Waller and Mulan, voted against it, supporting a 0.25 percentage point rate cut.

Some investors point out that if the U.S. central bank leadership frequently diverges from the committee on interest rate decisions, as seen in the UK, it would signify a major change and could pressure the market by increasing uncertainty in future decisions.

Clearly, Wall Street needs more time to digest the complex signals brought by this potential new chairman.

免责声明：本文章仅代表作者个人观点，不代表本平台的立场和观点。本文章仅供信息分享，不构成对任何人的任何投资建议。用户与作者之间的任何争议，与本平台无关。如网页中刊载的文章或图片涉及侵权，请提供相关的权利证明和身份证明发送邮件到support@aicoin.com，本平台相关工作人员将会进行核查。