New Fed Chair Kevin Warsh's Policy Outlook (with Carol Masser, Tim Stenovec)

Introduces the segment on new Fed Chair Kevin Warsh, noting the context of persistent inflation, political pressure, rising US debt, and the war with Iran.

Carol Masser

Michael McKee

Warsh will have a short runway of independence from President Trump. He cannot cut rates due to inflation and the war; he may need to raise rates, which is opposite of what Trump wants.

The President has a tendency to say things that aren't true or change his mind, so I'm not putting a lot of credence in that promise of independence.

Stuart Paul

The market is betting on a rate hike, but I'm not convinced. Tightening financial conditions (higher yields) are doing the Fed's work, buying them time to be cautious. Warsh's phrase 'independence and resolve' sounds hawkish.

The intersection of financial markets and the real economy is at the long end of the curve, where higher rates are already affecting home prices and mortgage rates, deteriorating buying conditions for durable goods.

Asks if a new Fed chair era is significant and if there is a learning period.

Carol Masser

Michael McKee

Warsh knows the Fed from his 5 years there, so the learning curve is shorter. Circumstances favor him as the FOMC is likely on hold indefinitely, so he doesn't have to force a consensus on a controversial move.

He will probably say he doesn't like forward guidance and will be attentive to what's happening, doing what monetary policy must do.

Asks about the practice of forward guidance and if ending it is good or bad.

Carol Masser

Stuart Paul

Ending forward guidance is good for policymakers to preserve optionality. It makes my job harder but that's what I'm here for. Warsh likely wants to move away from the dot plot and SEP, especially as the June dot plot will be difficult to explain if all cuts are eliminated.

Michael McKee

The SEP is generally fine, but the dot plot is problematic because the market treats the median as a Fed forecast when it's 19 different forecasts. Many FOMC members agree it's not the best way to present things, but they need something until a better idea comes along.

Stuart Paul

The SEP's real value was to signal no intention of raising rates to flatten the curve. In a period of high inflation, uncertainty, and global shocks, the SEP constrains your opportunity set and doesn't help communicate about rates further out the curve.

Shifts to the US consumer, noting big box retailers report customers feeling strained by higher gas prices. Asks how Warsh addresses this in an inflationary environment with war uncertainty.

Tim Stenovec

Michael McKee

There's not a lot Warsh can say. The Fed's goal is stable prices, which may require raising rates. He can acknowledge the pain, but the Fed's only tool is raising or lowering rates, and that's not going to help people at this point.

Asks about the real inflation story, considering AI costs, higher energy prices from the Iran war, and what is temporary.

Carol Masser

Michael McKee

Fed officials note inflation has broadened into service areas. Tariffs may not have peaked. The Iran war is driving headline numbers via energy prices. If the war ends, Warsh can say he can't cut today but is on a path to do so.

Stuart Paul

Warsh has said inflation is a choice central bankers make. With supply shocks and inflationary fiscal policy, his only control is to lean against demand, which he doesn't want to do. He needs to wait for inflation pressures to dissipate, which means a waiting game until low real wage growth stifles the broadening of inflation.

Asks about the impact of former Chair Jay Powell still being at the Fed.

Carol Masser

Michael McKee

Powell will stay low-profile. It will be a bit harder for Warsh because he has to deal with Powell in the room, but he won't want a public face-off.

Stuart Paul

Warsh won't be intimidated by Powell. Other committee members are independent and assertive enough, and enough are hawkish to prevent dovish missteps.

Carol Masser

Asks about the impact of former Chair Jay Powell still being at the Fed.

Michael McKee

Powell will stay low-profile. It will be a bit harder for Warsh because he has to deal with him in the room, but he won't want a public face-off.

Stuart Paul

Warsh won't be intimidated by Powell. Other committee members are independent and assertive enough, and enough are hawkish to prevent dovish missteps.

Michael McKee

Powell will stay low-profile. It will be harder for Warsh having him in the room, but he won't want a public face-off.

Stuart Paul

Warsh won't be intimidated by Powell. Other committee members are independent and assertive enough, and enough are hawkish to prevent dovish missteps.

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