A Fed Divided: Kevin Warsh's Headwinds & Potential Allies in FOMC

The FOMC is signaling a hike into a consumer-led downturn. Real-time data (delinquencies, weak hiring, Philly Fed) contradicts the Fed's inflation focus. Households are tapped out, using HELOCs to service debt as savings vanish. Incoming Chair Warsh will inherit a committee misreading the cycle, with high policy error risk as corporate margins face a demand cliff. The disconnect between policy posture and economic reality is the key trade.

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A Fed Divided: Kevin Warsh's Headwinds & Potential Allies in FOMC

The Fed minutes showed they wanted to remove easing language and seem ready to go either way on rates.

Nicole
Danielle DiMartino Booth

The Fed is preparing Kevin Warsh to walk into a divided Fed, with a clear willingness to ponder hiking rates later this year, which the market has been pricing in for December.

The minutes reiterated a divided committee.
What needs to change for a rate hike? Oil higher and inflation tied to it could be temporary.

Nicole
Danielle DiMartino Booth

There is continuing fallout in the labor market; teen hiring expectations for summer are the lowest since 1948, indicating distress.

Kevin Warsh needs to galvanize forces paying attention to the labor side of the Fed's mandate.
The minutes showed upside risk to inflation and downside risk to labor, making the dual mandate difficult.

Questioning whether Kevin Warsh leans towards one mandate over the other.

Nicole
Danielle DiMartino Booth

Warsh will be a younger Fed chair, more open to alternative data and paying attention to what Americans are saying, but there is an underlying risk of liquidity in the private credit market.

He will try to pay more attention regardless of political pressure.
How do you feel about the economy overall? Housing starts came down, jobless claims were better.

Nicole
Danielle DiMartino Booth

Continuing claims don't get enough attention; only 1 in 4 unemployed collect benefits, suggesting many are working gig jobs. Walmart said tax refund money ran out quicker, and consumers are pulling back.

Warsh will see through headlines versus reality on the ground.
People say the economy looks good and can tolerate higher yields and gasoline, but delinquency rates in the New York Fed's household debt survey are rising across all categories.

Nicole
Danielle DiMartino Booth

The New York Fed data shows households will spend much less on discretionary items. The Philly Fed printed negative, new orders tanked, and employment stayed negative for two months. Manufacturing in Germany and France fell into contraction.

There is no demand follow-through, which could manifest as a margin squeeze for companies.
When Kevin Warsh walks in, he won't see a united committee like under Powell. Which players will be loudest?

Nicole
Danielle DiMartino Booth

Powell might be Warsh's greatest advocate, deferential to his ability to form consensus. Christopher Waller and Philip Jefferson could be allies. Warsh has experience from the financial crisis.

He will garner respect from those not outwardly political.
Tell households to save, save, save?

Nicole
Danielle DiMartino Booth

Households would like to save but have run down savings and are leaning on credit cards. Home Depot said people are taking home equity lines to pay off debt.

Warsh will pay attention to what companies say about US households.

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