Tossed in the Fed's new Warsh cycle

The Federal Reserve’s next move is always somewhat of a guessing game. And right now, everyone is busy trying to size up a big Kevin-Warsh-shaped question mark.

The central bank’s first meeting with the new Fed Chair kicks off tomorrow, and nobody quite knows what to expect from Warsh, who was first nominated by President Trump for the position in January and was sworn in last month.

After all, Warsh, who was a Federal Reserve Governor from 2006 to 2011, has built a reputation as a monetary hawk. But in the run-up to taking the top job, he seemed to echo President Trump’s stated view that the Fed should lower rates to give the economy a shot in the arm.

While Warsh assured legislators he’s going to respect the Federal Reserve’s independence, how much fealty he’ll show to President Trump is still an open question. Especially given that Trump turned on his last Fed nominee, Jerome Powell, after he refused to set monetary policy in line with Trump’s demands.

The Fed’s perilous puzzle

One thing’s for sure: Warsh won’t be getting softballs teed up at his first press conference on the job. The Fed is in a particularly difficult position right now. Inflation is accelerating, even without accounting for the energy shock from the Iran war. Yet at the same time, consumer sentiment just hit an all-time low, while credit-card delinquencies just hit their highest level since the financial crisis.

In March, the Fed indicated that it would cut rates by the end of the year. Now, however, some officials are floating the possibility of raising rates at the next meeting, and the vast majority of traders are pricing in that rates will be kept the same.

Meanwhile, the press conference itself will be rich with signals about how Warsh plans to run the place.

“In our view, investors will be watching closely how Warsh characterizes inflation in his press conference (i.e., temporary supply shock or broadening impulse), whether he offers any forward rate guidance at all, how he addresses the committee’s divisions, any language on Fed independence, and whether he introduces his longer-term thesis that AI-driven productivity could justify lower rates,” explained Ameriprise Chief Market Strategist Anthony Saglimbene.

The stakes are high either way: If the Fed decides to eventually hike rates, it could throw cold water on the red-hot AI trade, and threaten the mega-IPOs in the works. But if the Fed fails to control inflation, that could lead to a rerun of the out of control prices we saw only a few short years ago. No pressure, Kevin. —LB