Remember, the Federal Reserve could spook your stock portfolio soon

If the stock market is worried about an untested new Fed chair with different views than the outgoing Jerome Powell, it’s not showing it.

Stocks are at records, in part because investors believe the transition from Powell to Kevin Warsh will be seamless (plus the latest earnings season has been awesome). Warsh is a former Fed governor — on paper, he should be a quick study on how the job is done.

But let’s be real for a second.

All new leaders have stumbles. All new leaders need an adjustment period. The first six months rarely go as planned 100% of the time.

Read more: How the Fed rate decision affects your bank accounts, loans, credit cards, and investments

And Warsh is entering the hotbed of a divided Fed and a president anxious to cut interest rates. Best believe he will be tested, and quickly.

That’s why I think it’s important to understand how Warsh is likely to be a different Fed chair than Powell. I am not saying uproot your portfolio on Monday, but be aware that a new risk factor is about to be presented.

Here’s what I heard from two Wall Street power players this week at the Milken Institute Global Conference. I think the expected decrease in communication from the Fed chair is a critical aspect to digest.

Billionaire private equity titan David Rubenstein

Carlyle co-founder David Rubenstein said investors should expect changes at the Federal Reserve under incoming chair Kevin Warsh, including less communication with markets.

But Warsh has a lot to prove on the Fed independence front, he added.

“I think what the market is waiting to see is this: When pressure comes for Kevin Warsh to lower interest rates from the president, will he say, ‘Look, we just can’t do it right now,’ or will he say, ‘Well, that’s what you want to do, we’ll do it,’” Rubenstein told me.

“I think the market is thinking there isn’t going to be a rate cut anytime soon,” he added. “That’s what the market numbers are suggesting. Whether Kevin is going to say that to the president, we just don’t know.”

Former Goldman Sachs leader and Trump insider Gary Cohn

Warsh stands to bring a “fundamentalist” approach to monetary policy, former National Economic Council Director Gary Cohn told me.

“Look, I think Kevin [Warsh] is a very standup straight guy,” Cohn said of Warsh. “What you saw during the confirmation hearing and what you saw from Kevin in the 2008 financial crisis is what you’re going to get. I don’t think there’s a lot of shock there.”

Cohn worked closely with Warsh during the 2008 financial crisis while Warsh was a Fed governor and Cohn was president of Goldman Sachs. He suggested that investors should expect two major shifts under Warsh’s leadership that could redefine the central bank’s relationship with Wall Street.

The first major change centers on the Fed’s multitrillion-dollar portfolio. Warsh is expected to be more “aggressive” than previous chairs in shrinking the Fed’s massive balance sheet without unsettling markets, per Cohn.

“That’s a fine line to walk,” Cohn noted, explaining that while the Fed has been in a slow sell-down, Warsh likely intends to increase the speed to reduce the government’s footprint in the credit markets.

Beyond the balance sheet, the era of Fed overcommunication may be coming to an end. Cohn argued that the central bank has become too involved in what he described as “nontraditional Fed activities” over the past eight years, including climate policy and social initiatives such as DEI.

“It’s not in the Fed’s mandate,” Cohn insisted, suggesting a narrowed focus is imminent.

“Kevin will be very much of a fundamentalist talking about the issues that are directly in the Fed’s core mandate,” Cohn said. This return to basics includes an overhaul of how the chair speaks to the public. He expects transparency from Warsh without being “regimented” to a strict transparency schedule.

“I think Kevin is going to communicate less,” Cohn said, noting the Fed has become too predictable, often signaling it cannot act on interest rates unless a press conference is already scheduled. This predictability, in Cohn’s view, has stifled the institution.

Brian Sozzi is Yahoo Finance’s Executive Editor and a member of Yahoo Finance’s editorial leadership team. Follow Sozzi on X @BrianSozzi, Instagram, and LinkedIn. Tips on stories? Email brian.sozzi@yahoofinance.com.

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