Fed chair nominee Warsh will have ideas, economy may deliver surprises, Daly says

The market implication is less about who leads the Fed than about the distribution of policy outcomes if the next chair arrives with a preset easing bias while inflation is being re-energized by oil. That combination raises the odds of a policy error in both directions: cut too soon and the curve re-prices for a later inflation-fighting reversal; stay on hold and front-end growth-sensitive assets keep grinding lower as real rates stay restrictive. The immediate beneficiary is volatility itself — rate uncertainty tends to widen term-premium dispersion and penalize duration-heavy assets even if the headline policy stance is eventually easier.

The second-order effect is on the Treasury/Fed balance-sheet interaction. Any perceived shift toward closer coordination will be read by the market as a higher probability of using the balance sheet more actively to manage Treasury issuance, which can steepen the curve through greater term premium even without higher policy rates. That matters for banks and levered credit: a steeper curve helps net interest margins, but a credibility hit at the Fed can widen credit spreads and offset that benefit quickly, especially in lower-quality IG and HY where duration and spread both matter.

The contrarian read is that markets may be overestimating how much a new chair can change the path in the next 2-3 meetings. If oil stabilizes or geopolitical risk premium fades, the disinflation impulse from shelter and wages can reassert itself by late summer, forcing a repricing back toward cuts. The better expression is not a macro directional bet on rates, but a relative-value trade between assets that benefit from a steeper curve and those that are most vulnerable to a higher-for-longer real-rate regime.