Markets Are Overreacting to Kevin Warsh. Where the Panic Is Coming From and Why a New Fed Chair Isn’t That Bad.

The U.S. stock market is experiencing a rather painful correction, and the selloff has hit not only the overheated tech sector but also defensive assets like gold. On the surface, the factors are quite obvious: May inflation jumped to 4.2% amid the Iran war and rising oil prices, and the market's overbought status has long demanded a pullback.

But it would be a mistake to blame the current drop solely on macroeconomics or geopolitics. I believe the main nerve of the selloff is the upcoming Federal Reserve meeting. The market is frankly afraid of uncertainty and simply doesn't know what to expect from new Fed Chair Kevin Warsh at his first meeting as head of the central bank.

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The essence of the current nervousness is that, for the first time in decades, institutional continuity on Wall Street has broken down. Previous transitions of power at the Fed went smoothly — new leaders didn't erase the legacy of the old ones, and policy changed evolutionarily. Now, the situation is different. A person with completely new views that sharply contrast with Jerome Powell's is taking the chair. For algorithms and large funds, such a break in the template is a reason to move to cash first and figure out the nuances later.

However, if we deeply dissect this fear and look into the mechanics of how the Fed works, it becomes clear that investors' worries are exaggerated.