Welcome Warsh
Last night saw the new chairman of the Federal Reserve, Kevin Warsh, hold a press conference following his inaugural policy meeting. The importance of last night’s event is hard to overstate. The transition of leadership within the US monetary institution was far from smooth. President Trump had nominated Warsh following attempted legal action against the former office holder, Jay Powell. Many saw that move as unjustified and ultimately the courts agreed. More than a messy transition, the appointment of Kevin Warsh, initially an unlikely candidate for such a position, brought around a pivotal question: central bank independence.
Last night’s decision therefore was not just about what the Fed might do with benchmark rates. It wasn’t even about how the shape and feel of how the world’s foremost central bank would face inflation in a post-Iran conflict environment: it was about whether the Fed had been politicised. Specifically, would it give into the pressure demonstrated from the White House recently in favour of lower interest rates. Activity and commentary overnight tell a clear story: no, it would not.
Warsh reiterated over and over again the Fed would not tolerate high inflation. The new Chair even went as far as to criticise the Fed’s track record of inflation forecasting noting that realised inflation has been persistently above target since the Covid pandemic. This rhetoric spurred the market into action. Before the meeting futures and OIS curves implied a flatlining in the path of benchmark interest rates in the US for some time ahead. Markets had believed the inflationary impact of the war in Iran was sufficient to end the Fed’s easing cycle but not turn it into a hiking cycle just yet. Today the picture is very different, building interest in a rate hike before year-end. The risk remains whether the President will have anything to say about the inaugural performance of his new appointee.
Discussion and Analysis by Charles Porter
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