Episode summary
The Fed’s Course Under a New Chair
Thoughts on the Market (Morgan Stanley)
· · 11 min · Hosts: Matthew Hornbach, Michael Gapen
Summary
The discussion centered on the Federal Reserve’s first FOMC meeting of 2026 and what the nomination of Kevin Warsh for Fed chair could mean for rates and markets. The guest argued the meeting read as a dovish hold: the Fed was clearly expected to pause, but its tone still suggested an easing bias and that rates should generally move lower over time.
On personnel, the guest said Jerome Powell has not signaled whether he will leave when his chair term ends in May, and the recent DOJ subpoena may make it more likely he stays involved. The host and guest also noted that Warsh’s exact role is still uncertain because it is not yet clear which seat he would fill on the committee.
On policy implications, the guest said Warsh’s views are not far outside the mainstream on near-term rate policy, so the reaction function probably will not change much. The bigger possible shift is on the Fed’s balance sheet and communication style: a smaller balance sheet and less communication could raise volatility, increase risk premia, and steepen the Treasury curve, but only over time and with significant coordination.
Key takeaways
- The guest said the January 2026 FOMC was a dovish hold, not a signal that the Fed is done cutting rates.
- The guest expects no material near-term change in the Fed’s reaction function if Kevin Warsh becomes chair.
- The guest said Warsh’s clearest policy divergence may be a push for a much smaller Fed balance sheet.
- The host argued that less Fed communication could lift rate and currency volatility and force investors to demand more risk premium.
- The guest said any balance-sheet shift would likely require coordination with Treasury and changes in rules and supervision.
Notable quotes
“in our view it was more of a a dovish hold and by that it it suggests to us or they suggested to us I should say that they still have an easing bias”
“I do think the recent subpoena by the DOJ has changed the calculus in that. At least my own view is that it makes it more likely that he stays around”
“we doubt that there will be a material change in the Fed's reaction function”
“he has argued over time for a much smaller balance sheet. He's called the Fed's balance sheet bloated”
“a Kevin Worshled Fed, if it decides to change the communication strategy, could naturally lead investors to demand more risk premium”
How the episode opens
Welcome to Thoughts on the Market. I'm Matthew Hornbach, global head of macro strategy. — And I'm Michael Gapen, Morgan Stanley's chief US economist. — Today we'll be talking about the Federal Open Market Committee meeting that occurred last week. It's Thursday, February 5th at 8:30 a.m. in New York. So, Mike, last week we had the first Federal Open Market Committee meeting of 2026. What were your general impressions from the meeting and how did it compare to what you had thought going in?
Well, Matt, I think that the main question for markets was how hawkish a hold or how dovish a hold would this be? As you know, it was widely expected the Fed would be on hold. The incoming data had been fairly solid.
Inflation wasn't all that concerning and most of the employment data suggested things had stabilized. So, it was clear they were going to pause. The question was would they pause or would they be on pause, right?
And in our view it was more of a a dovish hold and by that it it suggests to us or they suggested to us I should say that they still have an easing bias and rates should generally move lower over time. So that really was the key takeaway for me. Would they signal a prolonged pause and perhaps suggest that they might be done with the easing cycle?
Or would they say, "Yes, we've stopped for now, but we still expect to cut rates later, perhaps when inflation comes down and therefore kind of retain a dovish bias or an easing bias in the policy rate path. So to me, that was the main takeaway. Of course, as as we all know, there are supposed to be some personnel changes on the committee this year, and Chair Powell was asked several questions to try to get at the future of this committee and what he himself was going to do personally.
From the episode’s captions: roughly the first two minutes, lightly cleaned. Keep watching on YouTube →
Topics
- fed chair
- interest rates path
- us monetary policy
- macro strategy
Watch the episode
Watch “The Fed’s Course Under a New Chair” on YouTube
Summary, takeaways and quote selection by Octagon. Quotes are short excerpts; the full conversation is in the episode.
More from Thoughts on the Market (Morgan Stanley)
Thoughts on the Market (Morgan Stanley), this episode and its artwork belong to Morgan Stanley. Octagon is not affiliated with the show; this page is an independent summary.
