The Risk Window of Changing Leadership is Being Repriced
A report from Barclays brings the market's attention back to an old issue: the transition of Federal Reserve chairs is often not the end of uncertainty, but rather the beginning of volatility. Alexander Altmann, the head of Global Equities Tactical Strategy at Barclays, analyzed data since 1930 and found that in the first month, three months, and six months after a new chair takes office, the average maximum drawdowns of the US stock benchmark index are approximately 5%, 12%, and 16%, respectively, which are higher than the peak-to-trough declines in random years.
The Impact of a Nomination Beyond Being Hawkish or Dovish
The topic heated up because Donald Trump announced the nomination of Kevin Walsh to succeed Jerome Powell in May, pending Senate confirmation.
In terms of trading, the market first discussed whether he would be more hawkish; however, from an institutional perspective, it's more challenging to price his potential policy framework adjustments—such as a stronger emphasis on reducing the balance sheet and diminishing the influence of unconventional tools, all of which will directly affect liquidity expectations and risk asset valuations.
Divergence Among Institutions: Balance Sheet Impact vs. Stability Expectations
Some strategists focus on the liquidity withdrawal chain. Christopher Harvey of CIBC Capital Markets cautioned that if efforts are made to reduce the Fed's balance sheet holdings, it might be equivalent to withdrawing liquidity from the financial system, which is unfriendly to risk assets.
However, there is a view that the expectation of a "hawkish" balance sheet may serve as a stabilizer in the short term. Morgan Stanley strategist Michael Wilson mentioned in a report that Walsh's reputation might suppress the overheating sentiment in precious metals and provide moderate support to the dollar, thus gaining a time window for broader policy advancement.
Confirmation Process and Independence Controversies May Amplify Volatility
Besides macroeconomics and valuations, political factors are also heightening uncertainties. Reuters reported that Democratic members of the US Senate Banking Committee are calling to delay Walsh’s nomination due to the judicial investigations involving the Fed's leadership that have sparked debates on political pressure and independence. Elizabeth Warren and others are requesting discussions on the nomination to be postponed until after the investigations conclude.
For the market, this means both the "timeline" and "policy signals" might be extended: even if the nominee is ultimately approved, statements during the hearings, hints at the pace of balance sheet reductions, and changes in the language surrounding the interest rate path could all cause risk premiums to fluctuate repeatedly in the short term.
