Why Warsh May Let Markets Tough It Out

Summary

Mike Wilson analyzes Kevin Warsh's first Fed meeting, emphasizing the new chair's focus on price stability and reduced forward guidance. He argues the Fed may tolerate short-term market pain to build credibility and warns that tightening liquidity is a near-term headwind for equities into July.

• Wilson views Warsh's emphasis on price stability and less forward guidance as a healthy, overdue shift.
• He believes credibility is earned by doing something markets don't immediately like, and last week's market weakness was a necessary first step.
• The S&P 500 to gold ratio has rallied ~40% since Warsh's nomination, signaling market confidence.
• Near-term risk for equities is not rate hikes but tightening liquidity.
• Liquidity headwinds stem from fading balance sheet support (reserve program down 75%, Treasury buybacks halved) and accelerating lending growth.
• His work suggests this liquidity squeeze could remain a headwind for stocks into July.
• The key question is whether the Fed will allow short-term pain to strengthen longer-term credibility, and he suspects they will.