Christopher Combs, Chief Investment Officer, Silicon Valley Capital Partners
February 18, 2026
Executive Thesis
Every market cycle contains a moment when continuity gives way to re‑evaluation when the assumptions embedded in prices begin to loosen, not because policy has shifted, but because the framework governing it no longer appears fixed.
The possible appointment of Kevin Warsh as Chair of the Federal Reserve would represent such a moment.
Its importance would not stem from a clearly articulated policy agenda. It would stem from the opposite. Warsh has consistently framed his thinking in terms of regime change: questioning the appropriate size and role of the balance sheet, the primacy of incremental data dependence, the contours of Treasury–Fed coordination, and the Federal Reserve’s increasingly expansive communication practices.
That framing introduces a variable markets are quick to price and slow to resolve: uncertainty about the reaction function itself.
Until new leadership establishes clear priorities, operating boundaries, and a coherent framework for policy execution, the resulting monetary-policy vacuum becomes a risk factor in its own right, one that markets will continue to price independently of near-term economic data.
This paper outlines four channels through which a Warsh-led transition could represent a meaningful macro inflection point.
I. Balance Sheet Redefinition: Liquidity Without a Fixed Anchor
The Federal Reserve’s balance sheet expanded from less than $1 trillion prior to the global financial crisis to nearly $9 trillion at its pandemic peak. Even after sustained quantitative tightening, it remains several multiples larger than its pre‑2008 norm.
Warsh has been explicit in his criticism, repeatedly describing the balance sheet as “bloated” and arguing that its scale has outlived its stabilising purpose. The underlying question is not tactical but structural:
Is the balance sheet a durable liquidity anchor—or a distortion that suppresses market discipline?
Research following successive rounds of quantitative easing suggests that large-scale asset purchases compressed long-term Treasury yields by roughly 75 to 125 basis points at their peak. That compression flowed directly into lower mortgage rates, reduced corporate borrowing costs, and elevated equity valuations through lower discount rates.
If investors begin to anticipate a more aggressive or redefined balance-sheet unwind under a Warsh Fed, the repricing is unlikely to be subtle. Even modest increases in long-term real yields—on the order of 50 basis points—can materially compress valuation multiples in duration-sensitive sectors.
Absent clarity on the intended end state, liquidity itself becomes uncertain. Markets will price that uncertainty until the anchor is reset.
II. Reaction Function Uncertainty: Moving Beyond “Data Dependence”
In recent decades, Federal Reserve policy has been characterised by structured transparency. Inflation, employment, and growth data serve as explicit anchors; policy shifts are broadly pre-signalled; volatility tends to cluster around scheduled economic releases rather than discretionary surprises.
Warsh has questioned this approach, arguing that excessive focus on incremental data revisions risks policy myopia and institutional inertia. His critique implies a shift away from formulaic signalling toward greater discretionary judgement.
The market consequences are well established. When the mapping between data and policy becomes less predictable, Treasury volatility rises, implied risk premia expand, and traditional equity–bond correlations become less reliable.
Historical precedent is instructive. During previous regime transitions—notably in the late 1970s—rate volatility surged as investors struggled to infer the new policy rulebook.
Markets can adapt to hawkish bias.
They can adapt to dovish bias.
What they struggle to price is ambiguity about the rules themselves.
Until the reaction function is clearly articulated, that ambiguity persists.
III. Treasury–Fed Boundaries: Independence as a Pricing Variable
Warsh has periodically referenced the possibility of revisiting the Treasury–Fed relationship, invoking the 1951 accord that formalized modern central-bank independence.
The contemporary backdrop is materially different. Federal debt now exceeds 120 percent of GDP, and interest expense is among the fastest-growing components of public spending. In such an environment, even rhetorical uncertainty around monetary–fiscal boundaries carries market significance.
If investors perceive a blurring of institutional independence, the response is typically swift: higher inflation breakevens, upward pressure on real yields, a softer dollar, and relative outperformance of gold and other real assets.
Independence is not a philosophical abstraction; it is embedded in term-structure pricing. A 25–50 basis-point drift in long-term inflation expectations materially alters equity discount rates and corporate financing assumptions.
Until leadership clearly delineates the boundary between the Federal Reserve and the Treasury, fiscal-dominance risk remains priced.
The vacuum endures.
IV. Communication Retrenchment: Concentrating Volatility
Over the past two decades, the Federal Reserve has expanded its communication apparatus substantially—dot plots, press conferences, frequent speeches, and detailed economic projections.
These tools have served to reduce uncertainty by shaping expectations ahead of policy decisions. Warsh, however, has expressed skepticism about excessive forward guidance, arguing that policymakers risk becoming constrained by their own words.
If communication is scaled back, the implications are straightforward. Markets receive fewer forward signals, policy meetings carry greater surprise risk, and implied volatility premiums rise structurally.
History suggests that when guidance weakens, volatility does not disappear—it becomes episodic. Even incremental signaling shifts, such as during the 2013 taper episode, produced sharp moves precisely because expectations lacked a stable interpretive framework.
Reduced communication does not eliminate uncertainty.
It concentrates it.
The Monetary Vacuum as a Performance Factor
A Warsh nomination would represent a pivot not because of predetermined policy outcomes, but because of transitional uncertainty.
Until new Federal Reserve leadership establishes clear direction across balance-sheet policy, reaction-function design, Treasury coordination, and communication strategy, the monetary-policy vacuum will persist.
Markets are likely to price that vacuum through:
- Higher equity risk premia, as valuation multiples compress under discount-rate uncertainty.
- Wider credit spreads, reflecting compensation for macro-policy ambiguity.
- Outperformance of real assets, as commodities and gold regain relevance as institutional hedges.
- Greater factor dispersion, with balance-sheet strength and duration sensitivity driving differentiation.
- Elevated structural volatility, across both rates and equities, relative to prior-cycle norms.
Markets reprice uncertainty before they reprice fundamentals.