For much of the last 17 years, the bulls have held the reins on Wall Street. With the exception of the five-week COVID-19 crash in February-March 2020 and the nine-month-long 2022 bear market, the Dow Jones Industrial Average (^DJI +0.02%), S&P 500 (^GSPC 0.24%), and Nasdaq Composite (^IXIC 0.14%) have been trending decisively higher since the Great Recession bottom in March 2009.
But as history teaches us, stock market corrections, bear markets, and even pesky crashes are perfectly normal aspects of the stock market cycle. It's not a matter of if the Dow, S&P 500, and Nasdaq Composite will head lower; it's a matter of when and why.
While several catalysts are threatening to pull the rug out from beneath this artificial intelligence-driven bull market, perhaps the biggest risk is an upcoming shift at our nation's foremost financial institution: the Federal Reserve.
Jerome Powell's term as Fed chair ends in less than three months. Image source: Official Federal Reserve Photo.
May 15 will mark the end of Jerome Powell's tenure as Fed chair. Ongoing clashes between President Donald Trump and Powell over interest rates made it clear that Powell's current term would be his last.
On Jan. 30, Trump nominated Kevin Warsh to succeed Powell as Fed chair. If Warsh receives a majority of votes from the Senate Banking Committee and then U.S. Senate, he'll be positioned to become the 17th Federal Reserve chair since 1914.
While Warsh brings previous experience on the Federal Open Market Committee (FOMC) -- the 12-person body, including the Fed chair, responsible for setting the nation's monetary policy -- to the table, other aspects of his tenure, as well as his vocal critiques of the central bank, may come back to bite Wall Street.
Kevin Warsh is inheriting a $6.6 trillion conundrum
Warsh previously served on the Board of Governors of the Federal Reserve from Feb. 24, 2006, to March 31, 2011. As a voting member of the FOMC, he helped steer the U.S. economy through its most challenging period (the Great Recession) in a long time.
But there are aspects of Warsh's approach to monetary policy that may be perceived as less than ideal by Wall Street and investors.
For example, Warsh has been an outspoken critic of the Federal Reserve's bloated balance sheet. During periods of economic uncertainty, the Fed has undertaken open-market operations and purchased U.S. Treasury bonds and/or mortgage-backed securities (MBS). Since bond prices and yields are inversely related, buying bonds increases their price and pushes down yields, subsequently lowering borrowing costs.
US Total Assets Held by All Federal Reserve Banks data by YCharts.
Prior to the 2008 financial crisis, the Fed's balance sheet totaled less than $900 billion. By March 2022, it was knocking on the door of $9 trillion, with this figure primarily consisting of long-term Treasury bonds and MBSs.
Although a period of quantitative tightening allowed the central bank to reduce its balance sheet to $6.6 trillion as of mid-February 2026, Warsh has made clear that he views the Fed as a passive entity rather than an active market participant. He'd prefer to see the Fed significantly deleverage its balance sheet during his tenure.
The issue isn't whether the Fed's balance sheet should be reduced or not -- it's how to get these assets off the balance sheet without disrupting the stock market.
Keeping in mind the aforementioned inverse relationship between bond yields and prices, dumping long-term Treasuries would be expected to increase yields and, therefore, interest rates. Likewise, selling trillions in MBSs may potentially increase mortgage rates.
With President Trump practically demanding lower interest rates and investors pricing in an ongoing rate-easing cycle, Warsh's call to meaningfully reduce the Fed's balance sheet would likely work opposite to this expectation.
Image source: Getty Images.
Warsh's hardline stance on inflation may worsen division within the FOMC
Additionally, Trump's Fed chair nominee has an extensive track record of favoring one aspect of the Fed's two goals over the other.
The Federal Reserve aims to maximize employment and stabilize prices. Prior to, during, and after the Great Recession, Warsh's voting track record as a member of the FOMC and his commentary show he was focused almost exclusively on the prevailing inflation rate. Even as the unemployment rate rose rapidly during the financial crisis, Warsh remained steadfast in this view that lower interest rates could trigger an unfavorable response in prices for consumers.
Superficially, Warsh's voting track record suggests that he's unlikely to aggressively push for lower interest rates -- something President Trump has been adamant about since his second term began in January 2025.
"If Trump wants someone easy on inflation, he got the wrong guy in Kevin Warsh."@AnnaEconomist pic.twitter.com/FGMfeSqHpU
-- Daily Chartbook (@dailychartbook) January 31, 2026
However, the bigger takeaway is that Warsh's monetary policy approach may not align with most members of the FOMC. Although Warsh would be just one of 12 voting members, investors pay close attention to the collective thought process within the FOMC.
Given that the FOMC relies on backward-looking economic data when making its monetary policy decisions, it's not uncommon for the central bank to be behind the curve when adjusting the federal funds target rate. Investors tend to be forgiving of tardiness and even the occasional wrong move by the nation's central bank.
What Wall Street hasn't historically tolerated is a divided FOMC. Each of the last five FOMC meetings under Jerome Powell has featured at least one dissent. Moreover, the October and December meetings each had dissents in opposite directions. Even though the FOMC voted in favor of a 25-basis-point cut to the federal funds target rate in both meetings, at least one voting member favored no reduction, while another pushed for a 50-basis-point cut.
While Warsh is unlikely to affect FOMC meeting outcomes, he could exacerbate division within the FOMC and undermine the Fed's credibility, which is of utmost importance to investors.
