The appointment of Kevin Warsh is a market stabilizing mechanism, claims Morgan Stanley

By Jules Rimmer

Recent gold boom signaled investor unease with a weak dollar policy

Kevin Warsh, generally seen as the most hawkish of the candidates in the running for the Federal Reserve Chairman, could be good for markets, says Morgan Stanley.

The nomination of Kevin Warsh as the next Chair of the Federal Reserve ought to restore the market confidence that had been so profoundly shaken in recent months.

That's according to Morgan Stanley's chief equity strategist Mike Wilson who believes the eventual appointment of Warsh - widely viewed as the most hawkish candidate on the roster - will serve as a 'credibility anchor', slowing the dollar's fall. That's even if a weaker dollar remains a fundamental policy objective of President Donald Trump's administration

The "parabolic rise" in precious metals (GC00) (SI00) in recent months indicated financial markets were uncomfortable with the pace of the dollar's DXY decline, and Warsh could take some steam out of gold and silver move, Wilson told clients in a note published Monday.

Wilson reminded investors that the 'run-it-hot' monetary policy - pushing interest rates lower than inflation would suggest is appropriate - is a central component of the Trump administration's debt management strategy. He argues the White House is pursuing higher nominal and real GDP growth (GDP adjusted for inflation) as a way of managing the government's debt mountain and its fiscal/ budget deficits.

Wilson suggests the Trump administration, through its run-it-hot approach, wants the private sector to play a greater part in economic growth, stimulating productivity gains and wage growth. As a consequence, the Fed is being forced to tolerate inflation remaining above its 2% target.

Wilson and his equity strategy team advance what they call a "three-plane rebalancing framework," which runs counter to what many market participants believe. They see the administration planning to fix external trade imbalances through a weaker dollar and tariffs and domestic imbalances (over-consumption/ under-investment) via capex incentives and trade policies within the One Big Beautiful Bill Act.

Finally, the White House will target the K-shaped economy of higher earners seeing income grow while those on lower wages struggle, by trying to stimulate wage growth at the lower end, and not cash handouts.

This policy mix is already leading to outperformance in cyclical, small-cap and capex-intensive stocks, they say. The recent decline in the S&P/ gold ratio SPX indicated skepticism on behalf of markets to successfully implement these policies, but the appointment of Warsh and the sharp reversal in that ratio Friday suggests "confidence may be restored".

The recent fall in SPX/GOLD into last Friday may have been a result of skepticism around the U.S.'s ability to extricate itself from its debt problem.

Morgan Stanley added that a falling gold price and productivity gains further down the line may generate further upside for stocks, and they suggest rotating from commodity cyclicals GNR to consumer cyclicals/ discretionary goods XLY.

-Jules Rimmer

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02-02-26 0644ET