By: Kathryn Rooney Vera, Managing Director and Chief Market Strategist
From the desk of our senior advisor, Jon Hilsenrath.
Summary: The path is now clear for Kevin Warsh to become Federal Reserve chairman, after North Carolina Senator Thom Tillis said Sunday that he will drop his block on Warsh’s confirmation. Tactically, the next question is whether Jerome Powell, the outgoing Fed chairman, will vacate his position as a Fed governor when his term as chairman ends May 15. Early news reports suggest Powell may remain at the Fed as governor until a federal investigation is fully and completely resolved in courts; not merely on Trump Administration assurances.
We may learn more about Powell’s plans at his final press conference as Fed chairman Wednesday. The central bank is surely on hold at this week’s meeting. The key signal from Powell & Co. at this juncture is likely to be that Kevin Warsh is inheriting an institution that is not inclined to do anything about interest rates at present. This runs against President Trump’s desire for immediate interest rate cuts, but we think the market has it right. The President is not going to get them any time soon: Inflation is running high (no matter how you measure it); the Fed is run by a committee that is not now on board with more rate cuts; and the prospective new chairman is not promoting them aggressively.
At his confirmation hearing last week, it appeared that Kevin Warsh had laid some groundwork for rate cuts. He said artificial intelligence and technology support the supply side of the economy, which in theory should hold down wages and inflation. (Nobody asked him about the implications of stagnant labor supply, which goes in the other direction.) He also suggested he prefers alternate measures of inflation that might be seen as lower than conventional measures. However, Warsh did not sound like a person making a strong, eager, or compelling case for a much lower benchmark interest rate. For example, he noted that the labor market is in balance and that inflation is still a topic of dinner table conversation for many Americans; not dovish observations...
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