New Federal Reserve Chair Kevin Warsh’s ability to guide the US central bank will depend upon the market’s belief he is not beholden to President Donald Trump. Taking the oath in a White House ceremony did him no favours. It was the first time since President Ronald Reagan swore in Alan Greenspan that the ceremony took place there instead of at the central bank’s headquarters on the National Mall. Yes, Trump praised Warsh and said he should be “totally independent”. But context is everything.
The President’s comments might reflect his realisation that it would be counterproductive to pressure Warsh immediately. He will not be able to deliver – or even want to deliver – a rate cut in the June policy meeting in the face of rising inflation, geopolitical uncertainty and hawkish dissenters, so why spend the political capital. Also, Trump needs to show confidence in Warsh as he was not a frontrunner for the post (Christopher Waller, then Rick Rieder, then Michelle Bowman, then Kevin Hassett). So, it seems he gave Warsh a hall pass. But just like the ones you got in high school, it will eventually expire. Then Warsh might not want to check social media.
While rising inflation has not completely stifled consumer spending, concern is rising
The probability of a shift in the fed funds target range, currently 3.50-3.75%, at the Federal Open Market Committee (FOMC) meeting June 16-17 is all but zero, But what of the rest of this year? While rising inflation has not completely stifled consumer spending, concern is rising. It probably will continue to grow but at a slower pace after the Iran conflict cools. The last (March) Summary of Economic Projections (SEP) still indicated one 25bps cut this year; June’s will almost certainly forecast no change. It is possible the dot plot will include nods by some policymakers to a hike.
Speaking of the dot plot
Chair Warsh has been openly critical of forward guidance. His argument is that it boxes in the Fed, hampering its ability to make effective monetary policy. He doubled down in his Senate confirmation hearing: « The Fed tells the whole world what their dots are going to be, what their forecasts are going to be. » He also claimed that policymakers are human, so “They hold on to those forecasts longer than they should. » Not sure we agree, especially as their choices are anonymous.
Here’s the thing – Warsh does not have as much power as a chair of a company, foundation or other types of boards. Formally altering or eliminating structural reports, such as the Summary of Economic Projections (SEP), requires a majority FOMC vote. He will have to take his time, and the temperature of the room, before pushing for changes. If Warsh plays hard ball, he could downplay the forecasts in his press conferences. But if he cannot win over his colleagues on procedural issues, the more significant items on his agenda, such as lowering the Fed’s balance sheet, will be difficult.
Holding steady
May was a solid month for US money market funds, up more than US$100bn assets under management for the month, using iMoneyNet numbers. With the Fed on hold and political turmoil the base case, it is possible they will hit new highs this summer. Another sign of industry health comes in the overnight market. The Fed reverse repo facility continues to have minimal usage, both in terms of money and counterparties. The less that liquidity products have to tap the government, the better the system is working.
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