A Carbo-loaded Week

Kevin Warsh’s pending nomination removes a multi-month period of uncertainty about who the nominee may be. Our upfront conclusion is that this nomination does not change our glass half-full perspective for diversified portfolios, but we will examine several important considerations surrounding Warsh’s nomination.

Warsh brings capital market experience from his investment banking and asset management roles, academic perspectives from his time as a lecturer and scholar at Stanford, and actual Federal Reserve involvement: He was the youngest Fed nominee under President George W. Bush and ultimately served as a member of the Fed’s Board of Governors from February 2006 through March 2011.

During his initial Fed tenure, which included the 2008-09 financial crisis, Warsh was labeled an “inflation hawk” and was known as someone particularly concerned about lowering interest rates and engaging in perpetual policies such as quantitative easing (i.e., government buying of securities to reduce borrowing costs).

Most recently, Warsh served as a partner at Stanley Druckenmiller’s family office. Druckenmiller is considered one of the greatest macro investors of all time. After this morning’s announcement, Druckenmiller said in a Financial Times interview, “The branding of Kevin as someone who’s always hawkish is not correct. I’ve seen him go both ways… Kevin right now very much believes you can have growth without inflation.”¹

The Fed held its interest rate targets steady as expected, and this meeting did not include the “Summary of Economic Projections,” where Fed officials submit their views on expected inflation, employment or future rate decisions. However, the Fed’s statement and press conference revealed some important considerations.

First, as we have highlighted in past editions of the Weekly Five, the Fed made a significant shift last summer, moving its focus from inflation concerns to labor market concerns. In a speech during the annual Jackson Hole symposium, Fed Chair Jerome Powell noted his concerns about a challenging labor market, opening the door to future rate cuts. In the statement that accompanies the Fed’s interest rate decision released this week, the Fed noted that while job gains remained low, the unemployment rate has shown some signs of stabilization.² In other words, the labor market is still weaker than the Fed may want, but it is improving.

Second, the Fed noted that inflation “remains somewhat elevated,” acknowledging some uncertainty about price levels’ forward path.³ Economic data this week, including inflation at the producer level, still show signs of lingering inflation while consumer expectations for future inflation edge lower. As Chair Powell reflected during the scheduled press conference, risks to labor markets and inflation were slightly less than those of recent periods.

Third, the Fed’s balance sheet — the aggregate of assets purchased and held — saw some subtle changes revealed at this meeting. The Fed had allowed for some bond holding “run-off” — the maturing of held securities — but began purchasing shorter term securities to promote liquidity at the end of last year.

Finally, the Fed also reaffirmed its “Statement on Longer-Run Goals and Monetary Policy Strategy,” outlining its monetary policy approach and the revisions for 2025. With Chair Powell exiting as chairman this year, this framework could be revisited under a new Fed chair, so we will be interested in any alterations at this point next year.

This week brought several reinforced themes. First, the software industry, which makes up roughly 10% of the S&P 500 index, remains challenged. Germany’s SAP, one of the most significant tech companies domiciled outside of the U.S., and ServiceNow stocks fell 15% and 10%, respectively, following their earnings releases on concerns that AI may challenge their growth rates. IBM was a notable exception on the software front, demonstrating a growth rate that surprised Wall Street and emphasizing a unique product mix that could drive further growth.

AI enablers like Dutch-based ASML, which manufactures semiconductor equipment, continue to get the benefit of the doubt on future growth. Companies fear the concept of “lost demand,” or not having enough inventory to match chip demand. ASML’s U.S. listed shares are up 35% so far this year, suggesting that markets are very comfortable with both the sustainability of certain AI infrastructure players and the returns these companies can generate. Ironically, despite significant reported demand, ASML did announce job reductions for the first time since 2020.

Apple, Microsoft, Meta and other diversified tech companies had more mixed results, and analyst focus has been company-specific: However, using the three-stage framework we outlined above, growth rates, sustainability and return on capital were key considerations. Microsoft, which has performed extremely well, had slightly less growth in some of its key functional businesses relative to expectations, which negatively impacted the stock. Investors continue to focus in on growth rates for hyperscalers enabling or benefiting from AI developments. The scrutiny seen by investors on quarterly earnings within tech versus a “rising tide lifts all boats” mentality suggests a differentiated absorption cycle from the dot-com era to date.  

On Tuesday, the U.S. dollar traded below levels not seen since September on both a trade-weighted basis and against traditional foreign exchange benchmarks. The catalysts for the dollar’s most recent decline include trade policy, Japanese developments that we have covered in these pages, geopolitical developments in Iran, budget deal agita and other variables.

Recognizing the complexities inherent in global trade, we do not view dollar weakness as an immediate concern, but we do emphasize the importance of having a multi-factor, diversified portfolio to help offset currency and other risks. A weaker dollar does make U.S. exports more attractive to foreign buyers, but a persistently falling currency coupled with adverse bond market movements can concern foreign holders of U.S. assets or prospective buyers. Despite weakness over the past two calendar years, the dollar remains in a multi-year uptrend — but, in a world of heightened geopolitical risk, reliance on past trends cannot be a given. 

¹ Stanley Druckenmiller Says Kevin Warsh is Not a Permanent Policy 'Hawk.' Finanical Times. Accessed 30 January 2026. https://www.ft.com/content/4ec81de7-eb59-4be8-81db-bff657e6c5d3. 

² January 2026 Federal Reserve FOMC Statement. Accessed 30 January 2026. https://www.federalreserve.gov/newsevents/pressreleases/monetary20260128a.htm.

³ Ibid