The Week Ahead (2nd - 6th February) - Trump chooses a hawk; gold crashes

Hello and welcome to the latest edition of the Week Ahead!

It has been a dramatic week in the markets, and so for once it’s worth reflecting in this article on what has just happened.

Just a few hours ago (it is Friday evening, UK-time), President Trump confirmed that Kevin Warsh will be the next Chairman of the Federal Reserve, in his usual all-caps style:

I am pleased to announce that I am nominating Kevin Warsh to be the CHAIRMAN OF THE BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM…

I have known Kevin for a long period of time, and have no doubt that he will go down as one of the GREAT Fed Chairmen, maybe the best. On top of everything else, he is “central casting,” and he will never let you down. Congratulations Kevin! PRESIDENT DONALD J. TRUMP

Kevin Warsh is not a PhD economist, but does have formidable Wall Street and Federal Reserve experience, and was the favourite to win this appointment (as we discussed earlier this month).

He is a serious appointment, and in some ways a surprising choice for a President who has spent years blasting the Fed for not cutting interest rates aggressively enough.

Warsh is considered to be a “hawk” when it comes to Fed policy, arguing that the Fed’s balance sheet is too large and needs to be reduced, with balance sheet reduction being a necessary counterpart to interest rate cuts.

In other words, Warsh might be amenable to rate cuts: but only if they go hand in hand with disposals of the Fed’s holdings - an action which inevitably raises the rates actually paid by the US government.

For example, this is from November 2025:

Warsh elaborated that he believes the Fed should “abandon the dogma that inflation is caused when the economy grows too much and workers get paid too much,” arguing that the Fed’s “bloated balance sheet, designed to support the biggest firms in a bygone crisis era, can be reduced significantly.”

“That largesse can be redeployed in the form of lower interest rates to support households and small and medium-size businesses,” Warsh concluded.

For context, the Fed’s current balance sheet is some $6.5 trillion, of which $4.2 trillion are US Treasuries:

Source: congress.gov

Warsh only has one voice on the FOMC, but of course it’s an influential one, and any sustained moves relating to the $4.2 trillion of Treasury securities on the Fed’s balance sheet could have enormous financial consequences.

To be clear, the Fed’s balance sheet has already been on a gradually downward-sloping trajectory in recent years: it was $9 trillion in 2022.

Trump’s announcement of the new Chairman came at a time when currency markets were already volatile: the gold price in particular, has been causing a great deal of excitement. But as I type this, it is down by about 8% today (Friday):

Source: tradingeconomics.com.

Of course the gold price is still massively up on almost any timeframe, and today’s move has been interpreted in some quarters as merely profit-taking. But it’s also likely to be a response to a confusingly hawkish selection for Fed Chair, who is likely to protect the value of the dollar. The main alternative choice for the position - National Economic Council Director Kevin Hassett - was seen as more favourable to rate cuts and a weak dollar.

Similarly, stocks are down today (the S&P has fallen 0.8%) as the market digests the news, accepting that faster rate cuts are now unlikely. But of course it’s still too soon to say how perfectly Warsh’s behaviour as Fed Chair will match up with his previous postures. He starts in May.

Looking ahead

In the short-term, next week will see a large number of US/international companies reporting, including Alphabet (NSQ:GOOG) and Amazon.com (NSQ:AMZN). UK stocks, having already published a large wave of full-year and Q3 updates, will be quieter.

In economic news, the Bank of England already cut rates in December, from 4% to 3.75%. No further cut is expected so soon after the most recent one. The market anticipates the next cut in June, although a minority of forecasters think a cut in March is likely.

The ECB is announcing its interest rate decision on the same day, but that is likely to be even less interesting: the ECB already has rates low at 2%, and it is currently not expected to make any change to rates in 2026. EU inflation of 2.3% is only marginally above their medium-term target. So don't expect any fireworks there. Next week's excitement is likely to still be all about the Fed, the gold price, and international company news. And we will also have some UK company news to keep us occupied.

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Economic Calendar

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Companies Reporting