Bond market isn't getting everything it wants from Trump's choice of Warsh for Fed chair

By Vivien Lou Chen

'Nominating Warsh avoids a lot of the worst-case scenarios, but it's still unclear what impact he will have on rates,' strategist says

President Donald Trump has selected former Federal Reserve governor Kevin Warsh as his nominee to be the next head of the central bank.

Traders in the roughly $30 trillion Treasury market were assessing President Donald Trump's nominee to be the next leader of the Federal Reserve and coming to the conclusion that they aren't going to end up getting everything they want.

On Friday, the bond market was trading in a manner that suggested there were some worries over Trump's selection of former Fed governor Kevin Warsh to replace Jerome Powell, whose term as Fed chair ends in May. Long-dated Treasury yields edged slightly higher, while shorter-term rates dipped - producing a wider gap between the two, known as a steeper curve. In particular, the concern is that Warsh, if approved by Congress, might push for more interest-rate cuts than are currently expected, which could end up creating inflation problems in the long run.

"Nominating Warsh avoids a lot of the worst-case scenarios, but it's still unclear what impact he will have on rates," said strategist Will Compernolle at FHN Financial in Chicago. For now, the bond market is telegraphing that "the Fed's current interest-rate trajectory under Fed Chair Jerome Powell is the correct way to manage risks." Fed officials have penciled in just one quarter-point rate cut for 2026, while fed-funds futures traders mostly expect two reductions by year-end.

If Warsh sticks closer to Trump's preferred stance on interest rates, he might push for more cuts than expected and a decrease in the size of the Fed's balance sheet, which is why the 10-year BX:TMUBMUSD10Y and 30-year Treasury yields BX:TMUBMUSD30Y inched up by less than 2 basis points each to 4.24% and 4.87%, respectively, on Friday, according to the strategist. The rate on the long bond intermittently surpassed 4.9%, before settling below that level as of 3 p.m. Eastern time.

Read: Here's what Trump's pick of Kevin Warsh to run the Fed means for the economy, markets and you

Meanwhile, the 5-year breakeven inflation rate, a gauge of average expected inflation over the next five years, hovered just above 2.5% on Friday, reflecting growing worries about sustained upside risks to inflation. The rate was as low as 2.28% at the start of the year, according to FactSet. Market participants had been so worried about Trump selecting someone who was going to "trash the institution" that the selection of Warsh is seen as "still within the margin of reasonableness," Compernolle said in a phone interview. The concern now is that Warsh might favor easier monetary policy at the expense of longer-term inflation, Compernolle added.

Warsh is a former Fed governor who quit the central bank in 2011 shortly after it embarked on a second round of bond purchases under then-Chair Ben Bernanke. His departure earned him a reputation as someone who was a bit more aggressive than his colleagues about limiting the Fed's footprint in markets through the use of its balance sheet. He has more recently advocated in favor of lower rates and a smaller Fed balance sheet. Warsh told Fox News last year that Trump is right to be frustrated with the Fed's policies under Powell.

"Warsh's views are going to evolve over time," said Derek Tang, an economist at Monetary Policy Analytics, a research and advisory firm co-founded by former Fed governor Larry Meyer. His views from the past, Tang added, are "not a good guide of what he could do as Fed chair."The Fed chair is just one person so Warsh "has a big job on his hands in getting everyone to see his views," which might conflict with what the rest of the rate-setting Federal Open Market Committee wants, Tang said in a phone interview. Still, "it's quite possible he might get one or two rate more cuts through than what's expected, so we could see four cuts in total by the end of year depending on how things go."

-Vivien Lou Chen

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