Kevin Warsh got the nod from President Donald Trump on Friday to succeed Jerome Powell as chair of the Federal Reserve – injecting some added volatility into commodity markets at the end of a wild week.
Warsh was seen as one of four top candidates for the job in a monthslong audition process that took on elements of a horserace as investors closely monitored betting markets. But Warsh, a former Fed governor, is still a somewhat curious choice for the job given Trump’s clear and oft-stated desire for much lower interest rates. While Warsh has echoed calls for easier monetary policy, he was widely viewed as an inflation hawk during and after his previous tenure on the Fed. In particular, he has criticized the Fed’s use of the bond-buying quantitative easing program since the 2007-2009 financial crisis.
Warsh, in other words, is seen as more in keeping with past Fed chairs rather than a radical departure. And that’s what sparked Friday market volatility, with the U.S. dollar rallying and gold collapsing:
- The ICE U.S. Dollar Index, a measure of the currency against a basket of six major rivals, was up 0.5%, with the bounce serving to undercut commodities that had previously found support on a weaker greenback.
- A parabolic rally that saw gold soar above $5,000 an ounce and silver surge past the $100-an-ounce threshold left futures for both metals vulnerable to a sharp pullback. The Warsh nomination and the accompanying bounce for the dollar sparked massive long liquidation. April gold remained down $430, or 8%, near $4,924 an ounce after falling more than $600 at its session low. March silver remained down $30 near $84.84 an ounce.
- Grain futures were bystanders this week, whipsawed by moves in the currency and in gold, silver and other metals. On Friday, that meant added pressure across the markets, with March corn losing 2 1/2 cents, March soybeans falling 8 cents and March SRW wheat shedding 3 ½ cents.
Easing the “debasement” trade: “The market reaction so far points to ‘less dovish’ and more ‘orthodox’ expectations, with independence fears easing at the margin,” said markets economist David Rosenberg of Rosenberg Research. “There is some unwinding in the so-called debasement trade.”
The debasement trade is a bet that the dollar and U.S. Treasuries will fall, while other traditional haven assets, particularly gold and other precious metals, will find continued support on fears loose fiscal and monetary policy will stoke inflation and “debase” the value of the U.S. dollar.
What Trump wants: Trump’s relentless criticism of Powell, who he nicknamed “Too Late” for his refusal to more quickly cut rates, and his calls for sharply lower rates below the rate of inflation have been cited as one justification for the trade.
Trump has made it clear he wants the next Fed chair to cut rates aggressively. Asked by the Wall Street Journal in December where he thought rates should be, Trump replied, “1% and maybe lower than that.” Rate cuts, he said, would help the U.S. Treasury reduce the cost of financing $30 trillion in government debt.
Trump’s efforts to fire Fed governor Lisa Cook and a Justice Department criminal probe into Powell’s congressional testimony on cost overruns in a renovation of Fed headquarters were viewed by critics as efforts to intimidate the Fed, underscoring concerns about Fed independence.
Friday’s market reaction, however, was likely amplified by the extreme positioning seen in gold and silver. Under the surface, there were signs of skepticism about the debasement trade, at least when it comes to the Fed delivering substantial easing in 2026. Fed-funds futures had largely priced in one to two quarter point rate cuts by year-end. On Friday, they reflected a 64% probability the Fed would deliver two or fewer cuts by the end of the year.
Warsh will have to convince his colleagues that more rate cuts are justified: That’s an argument he’s unlikely to win unless the labor market shows renewed signs of weakening or inflationary pressures ease up significantly later this year, said economists at Deutsche Bank, in a note.
- “One path towards rate cuts that Warsh could argue is that policy changes (e.g., deregulation) and an AI-driven productivity boom could lift potential growth and allow for inflation-less growth and renewed disinflationary pressures, such as (former Fed Chair Alan) Greenspan laid out in the 1990s,” they wrote.