As we outlined in our New Year Outlook Report, one of the most consequential events for markets in 2026 was the appointment of the next Chair of the U.S. Federal Reserve.
The race quickly narrowed to two frontrunners, Kevin Warsh and Kevin Hassett, with prediction markets closely tracking both candidates as betting favorites. Investors understood that while either choice would lead the same institution, the perceived policy stance and optics of independence would vary significantly between the two.
Ultimately, Kevin Warsh was named the successor to Jerome Powell, stepping into one of the most influential roles in the global financial system.
Two Candidates, Two Market Paths
From the beginning, we highlighted that the choice between Warsh and Hassett represented two distinct perceived approaches to monetary policy.
Kevin Hassett, widely viewed as more dovish and closely aligned with President Trump’s economic agenda, would likely have been more comfortable with higher inflation and maintaining lower interest rates for longer. In the short term, this stance would have been highly supportive for risk assets. Lower rates tend to boost equity valuations, encourage leverage, and push capital into higher-risk investments. However, with markets already having experienced a substantial multi-year rally, we believed that pushing ultra-low rates even further would have been akin to throwing gasoline on a fire. Over the long run, the risk of inflating asset bubbles, increasing leverage, and creating structural instability would have been meaningfully higher under a more aggressively accommodative stance.
Kevin Warsh, on the other hand, is known for his emphasis on sound money principles and preserving the credibility of the Federal Reserve. His approach is generally viewed as more hawkish, with a stronger focus on inflation control and limiting excesses in financial markets. While this stance is often less favorable for risk assets in the immediate term, we believe it ultimately promotes healthier and more sustainable market conditions over time.
The Initial Market Reaction
Since Warsh was named Fed Chair, markets have reacted with a notable pullback across several asset classes. Equities have declined, precious metals have weakened, and digital assets have seen further downside volatility. While these moves may feel uncomfortable in the short term, they are not unexpected, nor necessarily negative.
After a prolonged rally across risk assets, a period of consolidation is both healthy and necessary. Pullbacks help cool excessive optimism, reduce leverage and margin debt, and reset valuations to more sustainable levels. Long-term secular bull markets are rarely straight lines upward. They are built through cycles of advances and corrections.
From our perspective, this current pullback represents a constructive reset rather than the end of the broader bull trend.
Why Warsh Was the Right Pick — Optics Matter
One of the key reasons we believe Warsh ultimately emerged as the chosen Fed Chair comes down to optics.
Warsh has long been associated with sound money principles, smaller central bank balance sheets, and a skepticism toward excessive monetary intervention. Most notably, he previously walked away from the Federal Reserve following QE2, publicly suggesting that the scale of quantitative easing at the time was unnecessary.
On the surface, this makes him appear like the antithesis of easy money. And that is precisely the point.
In this new macro regime, where government debt levels are historically high, the Federal Reserve and Treasury ultimately need to be working in unison, even as the Fed maintains the appearance of independence.
The reality is straightforward: debasement through negative real rates is the only viable path forward to manage the debt burden.
There is no realistic scenario where debt is paid down in real terms through austerity or rapid fiscal tightening without severe economic consequences.
What Warsh provides is credibility.
By appointing someone known for his “sound money” stance, the administration reinforces the perception that the Fed remains independent, disciplined, and focused on inflation control. This perception is critical in keeping bond markets calm and preventing a disorderly rise in Treasury yields, avoiding what we are seeing in Japan.
At the same time, any Fed Chair ultimately approved by President Trump is likely aligned, at least broadly, with the administration’s long-term strategy.
In other words, while policy may appear independent on the surface, coordination behind the scenes becomes far more feasible.
Warsh delivers debasement in a more controlled and credible manner.
Rather than openly embracing easy money, which risks spooking bond investors, Warsh allows the process of negative real rates and financial repression to unfold under the banner of discipline and independence.
This gives Treasury yields a far better chance of remaining at reasonable levels, while still achieving the same long-term objective of gradually eroding the real value of debt.
Perception Versus Reality
It’s important to separate perception from reality in this environment.
The perception is that the Fed is restoring discipline, reining in excess, and returning to sound money.
The reality is that the Fed and government must ultimately allow inflation to run modestly above interest rates over time in order to stabilize the debt trajectory.
Warsh bridges this gap better than a visibly dovish candidate ever could.
A more openly accommodative Fed Chair may have delivered faster short-term gains for risk assets, but at the cost of undermining confidence in the currency and bond market.
Warsh offers a smoother, more sustainable path.
Our Take
While Warsh’s appointment may feel uncomfortable for markets in the near term, we believe the broader implications are positive for long-term stability.
Equities had become increasingly frothy after a prolonged rally and were due for a consolidation. Short-term volatility does not negate the longer-term opportunity. Pullbacks help reset leverage, cool excesses, and lay the groundwork for the next leg higher in what we still view as a secular bull market. Importantly, underlying economic and earnings fundamentals have not materially changed.
Easier policy may have delivered stronger short-term gains, but at the cost of higher long-term risk and structural instability. Warsh’s leadership strengthens the credibility of the Federal Reserve, and the perception of his sound money policies supports more stable bond markets and creates a healthier foundation for sustainable growth.
In a regime where debasement remains the only realistic path to managing elevated debt levels, real assets should continue to play an important role in preserving purchasing power. Sound money and outright deflation would increase the real burden of debt, making today’s debt dynamics even more difficult to manage.
As a result, assets such as stocks, gold and other real assets are likely to continue holding value over time in an environment of negative real rates.
Disclosure:
Quintessence Wealth, a registered Portfolio Manager in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Prince Edward Island, Quebec, and Saskatchewan, an Investment Fund Manager in Newfoundland and Labrador, Ontario, and Quebec, and an Exempt Market Dealer in Alberta, British Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario, Quebec, and Saskatchewan. The Ontario Securities Commission (OSC) is the principal regulator for Quintessence Wealth.
The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. The information contained herein may not apply to all types of investors. The opinions in this market outlook were prepared by Alfred Lee as of the date of this report and are subject to change without notice. The opinions expressed in this report are that of the author and do not necessarily reflect the opinion of Q Wealth as a firm. This report is not to be construed as an offer or solicitation to recommend Q Wealth products to clients.
