U.S. equities could face a choppy stretch in the months ahead as investors brace for a potential overhaul of Federal Reserve policy under Kevin Warsh, according to a strategy note from Wedbush Securities.
In a Feb. 1 report titled "Goodbye Fed Put," Wedbush analyst Sam Basham said President Trump’s choice of Warsh as the next Fed chair is likely to unsettle markets in the near term, before clarity improves later in the year. The firm expects volatility to persist until Warsh formally takes the helm in May, as investors begin to price in what it sees as a decisive break from the Powell-era playbook.
Wedbush argues that a Warsh-led Fed would shift its focus away from interest rates toward the size of the central bank’s balance sheet. Under what the firm calls “Practical Monetarism,” the Fed would target money supply rather than the policy rate as its main inflation-fighting tool, draining liquidity through quantitative tightening and shrinking the roughly $6.5 trillion balance sheet.
That shift, the report says, would mark the “death of the Fed put,” ending the assumption that the central bank will routinely step in to support markets outside of a true crisis. Wedbush warned that the approach could be negative for risk assets tied to excess liquidity, while favoring Treasuries and the U.S. dollar and weighing on gold and silver.
The firm expects the transition period to be bumpy. From now until May, Wedbush sees “more downside than upside risk” for stocks if negative momentum builds, as investors reassess high-beta exposures and rotate toward companies with durable, real growth.
The report also highlights Warsh’s long-standing skepticism of large-scale asset purchases, noting his resignation from the Fed in 2011 in protest of a second round of quantitative easing. Wedbush quoted Warsh as arguing that the Fed relies on outdated inflation models and fails to recognize productivity gains, instead treating economic growth itself as inflationary.
Over time, Wedbush said, a successful pivot toward tighter control of liquidity could anchor inflation expectations, support long-term rates and ultimately prove constructive for markets. But in the short run, it cautioned, investors should prepare for a volatile recalibration as the era of guaranteed liquidity support comes to an end.
