The Setup: Powell Held. The Punchline: Warsh.

Two days ago, Jerome Powell sat in front of the cameras and told America the economy is on "firm footing." He said monetary policy is "appropriate" right where it sits. He said the Fed isn't on a preset course. Then he walked out, probably knowing he had four months left before handing the keys to someone vastly more willing to turn them.

By yesterday morning, Donald Trump announced that someone would be Kevin Warsh.

The details matter less than the mood. Markets didn't freak out. That alone tells you everything you need to know.

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The Fed Meeting That Happened to Be Quiet

Let's rewind to Wednesday. The Fed held at 3.5%-3.75%, as everyone expected. Two dissenters—Stephen Miran and Christopher Waller—wanted cuts. The rest voted to wait. Powell walked the press conference like a man who'd already written his retirement letter.

What changed in the Fed's language matters more than what didn't change in rates:

The committee lifted its assessment of economic growth. Third-quarter GDP came in at 4.4%; the Atlanta Fed is now tracking 5.4% for the final three months of 2025. That's not recovery; that's momentum. Wages are still growing. Consumer spending is holding. Unemployment ticked up to 4.4%, but "showed some signs of stabilization" in Fed-speak—which means they're not seeing a labor market collapse.

On inflation, Powell explicitly said he expects tariff-related price increases to "top out" by mid-2026. He also—and this is key—stopped worrying quite so much about the labor market as the downside risk. The language erased the clause that said risks weighted toward employment. They're rebalancing the dial. Growth, suddenly, looks like the bigger problem than jobs.

For a Fed that cut 75 basis points over three straight meetings in the fall, this is a signal: we're done for now. Maybe we're done for the year. Markets priced in two cuts by year-end and none under Powell. That's a long pause.

Powell also did something unusual. When asked what advice he'd give his successor, he said: "Stay out of elected politics."

That was not a casual remark.

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Then Trump Announced Warsh

Kevin Warsh, 55, is a former Fed governor from 2006-2011. He worked under Ben Bernanke during the financial crisis. He's been through a recession in real time, inside the temple. He has credibility—real, earned credibility with markets and economists. He's not a Trump stooge in a suit, and that's exactly why Trump picked him.

Warsh also recently told CNBC the Fed needs "regime change." He's criticized Powell for focusing on climate and regulatory overreach. He called the Fed's balance sheet "bloated." He's said interest rate cuts should come. He's been publicly disappointed in the Fed's reluctance to embrace what he sees as the deflationary force of artificial intelligence.

Wall Street didn't panic. David Bahnsen, CIO of Bahnsen Group: "He has the respect and credibility of the financial markets. There was no person going to get this job who wasn't going to be cutting rates in the short term. However, I believe longer term he will be a credible candidate."

Translation: Fine, he'll cut rates, but he's not a pushover.

Markets viewed the pick as disciplined. Long-end Treasury yields actually rose on the announcement. The two-year and ten-year steepened. That's what happens when you nominate someone who markets believe will prioritize stability over expediency. It's the opposite of what you'd expect if Trump had picked Rick Rieder from BlackRock or some other accommodation machine.

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But Also: Microsoft Imploded

Let's not bury the lede under the lede. On Wednesday night, Microsoft reported earnings. Capital expenditures are massive—higher than expected. Cloud growth in the fiscal second quarter slowed. Operating margins guidance for Q3 came in soft.

Microsoft lost roughly 10% Thursday—its worst day since March 2020. That's $357 billion in market cap, the second-largest single-session wipeout. ServiceNow tanked 9.94%. Salesforce dropped 7%. Adobe slid. The software complex went into a moral crisis about whether their AI bets actually pencil out, or whether they're just throwing billions into a black hole and hoping magic happens.

By Friday, tech was still in a funk. The Nasdaq fell 0.94%. The S&P 500 shed 0.43%. The Dow, bucking tech gravity, actually climbed. Verizon—a boring utility stock in telecoms—surged 11.8% on better guidance. Small caps showed resilience. The Russell 2000 held up.

Here's what that means: The most important market signal of the week isn't the Fed decision or the Warsh nomination. It's that capital is starting to rotate away from megacap AI infrastructure—away from the companies spending the most on data centers and chips—and toward things that actually make money.

Copper rose. Oil held up. Healthcare held firm. The financials caught a bid. This is what a "risk rebalancing" looks like before a big monetary policy shift. Investors are repositioning for a world where rates might eventually fall, but where the Fed chair isn't trying to juice asset prices. They're rotating from "growth at all costs" to "growth that makes sense."

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The Unwritten Subtext

Powell made clear in that press conference: the institution matters. The Fed's independence matters. A sitting Fed governor (Lisa Cook) is literally fighting Trump in the Supreme Court right now. The Justice Department subpoenaed Powell over the Fed's renovation budget—which Powell called, in remarkably candid remarks, a "pretext" for Trump to pressure the Fed.

Trump then nominated Warsh, a credible, serious person with real Fed experience. Not a loyalist. Not an ideologue. Someone who will push for rate cuts (which Trump wants) but won't do it recklessly (which markets need).

Powell saying "stay out of elected politics" to his successor wasn't generic advice. It was a message: Here's the job. Do it right. Do it independent of what any president asks.

Trump responded by nominating someone tough enough to actually do that.

Is this the end of the pressure campaign? No. Warsh will likely face a brutal confirmation hearing. Senate Majority Leader John Thune already said he might not get confirmed without support from Tom Tillis. Democrats will grill him. The politicization of the Fed is very much still a live issue.

But for the first time in months, the market is willing to believe the Fed might survive as an institution. That's worth something.

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What You Missed in the Numbers

• Durable goods orders jumped 5.3% in November (excluding defense). That's ahead of the 4.5% consensus. Excluding transportation, they still rose 0.5%. Growth is broad-based, not just defense or AI.

• Producer Price Index came in hot for December: 0.5% monthly (beat the 0.3% estimate), 0.7% on core (beat the 0.3% estimate). Year-over-year at 3%, down from 3.5% a year ago. Goods prices were flat month-over-month. Services prices did the damage. Tariff inflation is in services more than goods—that's important context.

• Consumer sentiment ticked up to 56.4 in January from 52.9 in December. Not great, but improving. Consumers aren't broken.

• January up 1.4% for the S&P 500, 1.7% for the Dow, 1% for the Nasdaq despite all this volatility. The Russell 2000 jumped 5% for the month. Small caps had a monster January. Rotation is happening.

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The Through Line

Powell held rates, signaled patience, and defended the Fed's independence. Markets said: that's fine. Trump nominated someone serious instead of a yes-man. Markets said: that's better. Tech got humbled by reality. Markets said: maybe it was overpriced. Capital rotated into economically sensitive stuff and out of the most extended valuations.

This is what normalization looks like. It's not dramatic. It's not exciting. But it's the opposite of what we had in 2021-2023 when the only direction was up and the only question was how hard.

The month ends with the S&P near 6,940. The Fed is paused. The next chair is known. Earnings are mixed but not broken. Inflation is sticky but moving.

We're in the boring part of the movie. That's probably good.

The next act starts in May.