Will the market test President Trump's new Fed Chair? More importantly, will he pass?

Fed Chairman Alan Greenspan was tested early in his tenure by the October 19, 1987, stock market crash, known as Black Monday. His successor Ben Bernanke was greeted in 2006 by a weakening housing market, rising energy prices, and a struggling auto industry, a terrible economic trio that ultimately led to the Great Financial Crisis not too long after. And then Jerome Powell was immediately challenged upon becoming Federal Reserve Chair in February 2018 by a volatile stock market and a push to raise rates. 

So what are financial advisors expecting once President Trump’s nominee Kevin Warsh takes over as Federal Reserve Chairman from Jerome Powell in May, should he be confirmed by the Senate?

If, and when, Warsh is tested by one of the many threats now circling the market and economy, will he pass with flying colors?

Clint Sorenson, chief investment officer at Ascentis Asset Management, for one, expects overall uncertainty around the passing of the guard to Kevin Warsh to increase rate and market volatility. A federal judge quashed a Justice Department criminal probe into Federal Reserve Chair Jerome Powell last month, ruling that subpoenas concerning a $2.5 billion headquarters renovation were a "pretext" to pressure him. 

The main issue in Sorenson’s view is that the regime has shifted from a growth and inflation slowing regime, where the Fed typically eases policy, to a growth slowing and inflation accelerating regime where the Fed has to remain on hold. This sets up for a continued trend lower in economic growth because the Fed is usually reluctant to ease policy, according to Sorenson. 

“Couple the regime shift with uncertainty around the timing of the Fed leadership change and you have the recipe for a potential growth scare and heightened market volatility,” Sorenson said.  

As a result, Sorenson believes diversification and risk management are critical at this juncture. 

“We have been advocating all year for adding diversification strategies like hedged equity, global macro, CTAs, market neutral, to a portfolio, and keeping dry powder to take advantage of potential volatility. We also think shifting to active management over passive management makes sense here,” Sorenson said.

Robert Pearl, co-founder and wealth advisor at G&P Financial, says prolonged uncertainty around leadership only “feeds that drama” and can absolutely increase rate volatility and whipsaw market expectations. The best response for advisors is to stop treating Fed press conferences as entertainment and start treating client portfolios with the seriousness they deserve, according to Pearl.

“Instead of obsessing over every headline or press conference, advisors need to shift their focus from simple asset allocation to portfolio duration. The classic 60/40 portfolio took a beating in 2022 largely because the 40 side, often a plain bond aggregate sleeve, carried an effective duration of roughly 6.5 years. That left clients far more exposed to rising rates than many realized,” Pearl said.

The smarter move, says Pearl, is to assign a duration number to every investment and actively manage overall portfolio interest rate sensitivity. Practical options include building bond ladders, incorporating alternative investments, insurance-based solutions, commodities, or even CDs to help dial duration up or down as needed.

“The goal is a portfolio that’s resilient across multiple rate scenarios rather than one that’s hostage to the next Fed headline,” Pearl said.

Elsewhere, Nate Garrison, SVP and chief investment officer for World Investment Advisors, reminds clients to remember that “the Fed” is not the Fed Chair that is the ultimate decision-making authority. The Federal Reserve’s Open Market Committee (FOMC) is composed of 12 voting members, including the Fed Chair, all with equal votes.

“I continue to think that the FOMC is more focused on its employment mandate, and has been since 2024. Given recent softening in labor data, and the potential impacts to economic growth and labor demand from the spike in oil prices due to the closure of the Strait of Hormuz, I think the FOMC will be more accommodative to support the labor market and let inflation run a little hot if needed,” Garrison said.

He adds that longer rates have risk to the upside and that economic uncertainty makes high yield relatively unattractive. As a result, he has positioned his fixed income portfolios to be higher quality and a little shorter duration than the US Universal bond market.

Finally, Mike Martin, vice president of market strategy at TradingBlock, believes markets will adapt to Fed uncertainty. In his view there may be an increase in rate volatility, but he does not expect any material impact on the broader market. Investors will simply place more weight on other data sources, such as CPI and the labor market.

“With everything going on globally, including geopolitical tensions, shifting energy markets, and persistent inflation pressures, positioning can’t be static, especially for portfolios with shorter time horizons. The ability to quickly adapt to new data and changing rate expectations is key,” Martin said, adding that options can help mitigate risk and manage exposure in this market environment.