In sixty days, the most powerful central banker in the world will change. Jerome Powell’s term as Federal Reserve chair expires on 15 May. His nominated successor, Kevin Warsh, has not yet been confirmed by the Senate. Between now and then, the Fed must navigate the largest oil supply disruption in history, a war in the Middle East with no visible exit, a credit market showing early signs of stress, and an economy whose Q4 GDP growth was just revised down to 0.7%.

This is not a routine transition. It is a handover in the middle of a crisis, complicated by a Senate blockade, a criminal investigation, and a president who regards the Fed chair as an instrument of his economic agenda.

What Powell leaves behind

The FOMC meets this week (17-18 March). It will almost certainly hold rates at 3.50-3.75%. Markets price a 92%+ probability of no change. But the meeting is consequential for three reasons.

First, the updated dot plot. The December median projected two cuts in 2026. The March median is likely to shift to one or zero, as members absorb the oil shock. It would take only three members nudging their dot higher to eliminate the median cut entirely. That hawkish revision will collide with the market’s knowledge that Warsh, if confirmed, wants to cut.

Second, the dovish dissents. Governors Miran and Waller dissented in January, preferring a 25bp cut. Both are likely to dissent again. Miran’s term expired in January; he remains on the board only until his successor is confirmed. That successor is Warsh. Every dovish dissent from Miran is a preview of the Warsh Fed’s instincts.

Third, Powell’s press conference. This is his penultimate as chair. He will be asked about the war, the oil shock, the transition, and the DOJ investigation. He will dodge most of it. But his framing of whether the oil shock is “transitory” or structurally inflationary will set the analytical baseline that Warsh either inherits or repudiates.

Powell’s legacy position is paralysis. He cut three times in 2025, then stopped. He faces a supply-driven oil shock that monetary policy cannot fix: the Fed cannot reopen the Strait of Hormuz. Hiking would crush growth without taming oil-driven inflation. Cutting would validate the inflationary impulse. So he sits. The Fed is frozen, and Powell will hand over a frozen institution.

What Warsh walks into

Trump nominated Warsh on 30 January. The formal submission reached the Senate on 4 March. The confirmation is blocked by Senator Thom Tillis, who has vowed to hold until the DOJ’s investigation into Powell is resolved. The judge quashed the grand jury subpoenas in March, ruling that their purpose was to “harass and pressure Powell.” Tillis met with Warsh on 10 March but maintained his blockade. Bessent has brokered a deal for hearings to proceed, but Tillis will not let the vote leave committee.

The arithmetic is tight. The Senate Banking Committee has a 13-11 Republican majority. All Democrats oppose Warsh. Tillis and potentially Cramer have raised objections on Fed independence grounds. A single Republican defection in committee kills the nomination.

The confirmation timeline is therefore uncertain. Hearings in late March or April, a committee vote that Tillis may block, then a full Senate vote requiring 51 senators. Powell’s term expires 15 May. The window is closing.

The Warsh contradiction

Warsh’s known policy preferences create a specific tension with the current environment.

On rates, he has recently pivoted dovish. He has argued that productivity gains could allow rates to fall without reigniting inflation. He is expected to press for cuts once confirmed. Trump nominated him precisely because he wants lower rates.

On the balance sheet, Warsh is historically hawkish. He has advocated for a “Treasury-only” balance sheet and active sales of the Fed’s roughly $2 trillion MBS portfolio, a sharp departure from Powell’s passive runoff approach.

The combination – cutting rates while selling MBS into a war-disrupted market – is internally contradictory. Cutting the short end eases financial conditions. Selling MBS tightens the long end, pushing up mortgage rates. In an environment where Brent is at $103, the 10-year yield is at 4.27%, and the housing market is already under stress, active MBS sales would steepen the yield curve violently. That steepening is what some analysts have termed the “Warsh Shock”.

Whether Warsh actually pursues active sales in the middle of an oil crisis is an open question. He may prove more pragmatic than his prior rhetoric suggests. But the market must price the possibility, and that uncertainty alone is a volatility premium. A steeper curve means higher mortgage rates, tighter financial conditions for leveraged borrowers, downward pressure on equity valuations – particularly in rate-sensitive sectors like real estate, utilities, and growth stocks – and wider credit spreads. The long end of the Treasury market becomes the transmission mechanism through which the Warsh Shock, if it materialises, hits the real economy.

The Iran war makes everything worse

Strip away the transition drama and the Fed’s position would still be difficult. Add the war and it becomes nearly impossible.

The Strait of Hormuz has been effectively closed since late February. Gulf producers have cut at least 10 million barrels per day. The IEA’s 400-million-barrel stockpile release – the largest in its 50-year history – has failed to cap prices. Brent spiked to $120 before settling around $103. Iran’s new supreme leader has vowed to keep the strait closed. At time of writing, there is no ceasefire in sight.

This is a stagflation machine. Oil-driven inflation pushes CPI higher. The energy cost shock destroys consumer purchasing power and business margins. GDP growth, already anaemic, weakens further. The Fed’s dual mandate pulls in opposite directions: inflation says tighten, employment says ease. For asset prices, this combination is toxic: rising input costs compress corporate margins, higher discount rates weigh on equity multiples, and the long bond sells off on inflation expectations even as the economy slows. The assets that thrive in this environment are the ones that benefit from disorder – commodities, gold, and cash-generative businesses with pricing power.

Powell can look through a short-lived energy shock. But what if it is not short-lived? The IEA estimates that if disruptions persist, supply losses will increase further. Rystad projects Brent at $110 under a two-month war, $135 under a four-month war. The war is now entering its third week with no resolution.

The new chair – whoever holds the gavel on 16 May – inherits this. If it is Warsh, he faces an immediate choice: cut rates as Trump demands (and as his dovish instincts suggest), thereby risking an inflationary spiral, or hold steady and disappoint the president who appointed him precisely to cut. If it is an acting chair in a vacancy, the market faces the additional uncertainty of a temporary leader making consequential decisions.

Three transition scenarios

Warsh confirmed before May. The base case, but not guaranteed. Hearings proceed in late March or April, Tillis relents or is circumvented, the full Senate confirms with 51 votes. Warsh takes over a Fed that is frozen, a war that is active, and a market that must immediately price his reaction function. Expect dovish rhetoric on rates, ambiguity on the balance sheet, and extreme sensitivity to oil developments. The dollar weakens on the prospect of cuts. The 10-year steepens. Gold holds its bid. Equities initially rally on the rate-cut signal, but the steeper curve and oil-driven margin pressure cap the upside – a short-lived relief bounce rather than a sustained recovery.

Warsh confirmed late, gap period. Tillis holds until the DOJ probe is formally closed. Hearings proceed but the committee vote slips past 15 May. Powell leaves. Vice Chair Philip Jefferson becomes acting chair. The Fed operates without a permanent leader during an active oil crisis. Markets hate leadership vacuums. Volatility spikes. The dollar’s safe-haven bid competes with its institutional-credibility discount. Long-duration bonds and equities sell off on uncertainty; short-duration Treasuries and gold attract flows.

Warsh not confirmed. Tillis holds indefinitely. The Supreme Court has not yet ruled on whether Trump can fire Fed governors (the Lisa Cook case). If Warsh is blocked and no alternative is nominated, the vacancy persists. This is the tail risk scenario. The Fed loses its chair during the most complex macro environment since 2008, with no clear succession. Treasuries rally on flight to safety. Gold surges. The dollar sells off on institutional uncertainty. Equities, particularly financials and anything exposed to the US rate complex, face a sustained de-rating.

What this means for Japan

Every scenario above has implications for the yen and Japanese equities.

A rate-cutting Warsh Fed narrows the US-Japan rate differential. The BOJ, which has been cautiously normalising, finds itself with a weaker counterpart. The yen strengthens. Japanese exporters take a near-term hit, but the domestic reflation story – which depends on wage growth and consumption, not exports – remains intact. Foreign investors holding unhedged Japanese equities benefit from yen appreciation.

A leadership vacuum at the Fed introduces the kind of global uncertainty that historically drives safe-haven flows into yen. The BOJ’s next meeting is in April. If the Fed is in disarray, Ueda has cover to pause normalisation, keeping the short end of the JGB curve anchored while the long end reprices global risk.

The Bessent binding constraint – 10-year Treasury yield → mortgage rates → midterm politics – now passes to Warsh. If Warsh steepens the curve through MBS sales, the 10-year rises, mortgages become less affordable, and the political feedback loop that defined Bessent’s Treasury management intensifies. That pressure will push Warsh toward accommodation, reinforcing the dovish trajectory, reinforcing dollar weakness, reinforcing yen strength.

What we will be watching

This is the first article in what will be a series tracking the Fed transition and its market implications. In the coming weeks and months, Gyokuro will cover:

  • Wednesday’s FOMC statement and dot plot (18 March): The last data point of the Powell consensus. How many dots show zero cuts? Does the statement acknowledge the oil shock explicitly?
  • Warsh’s confirmation hearing testimony: His first public statements under oath about rates, the balance sheet, MBS sales, and Fed independence. This will be the single most important signal of the Warsh Fed’s direction.
  • The Tillis resolution: Does the DOJ probe end? Does Tillis relent? Does the committee find a procedural workaround?
  • Powell’s final press conference (the May FOMC meeting, if he is still chair): His exit framing will shape the narrative Warsh inherits.
  • The first Warsh presser: Tone, priorities, and whether the “Warsh Shock” on the balance sheet materialises or is quietly shelved.
  • The yen and JGB implications: How the BOJ responds to a changing Fed, and what it means for the Japanese equity thesis.

The Fed chair transition is not a political story. It is a market structure story. The identity, timing, and policy preferences of the next chair are first-order variables for rates, the dollar, credit, gold, and the entire constellation of assets that prices off the US risk-free rate. In the middle of a war, with oil above $100 and the economy slowing, getting this wrong is expensive.

– 玉露

This article is not investment advice. All data as of 16 March 2026 unless otherwise noted.