New Fed chair Kevin Warsh has a very difficult job ahead of him, as the man looks to maintain a balance between taming inflation and maintaining healthy employment while also avoiding any criticisms like those placed on Jay Powell for not cutting interest rates.
Of course, the independence of the Fed is of critical importance, but, at the same time, one doesn’t want to disappoint the person who got one the job to begin with. While Elizabeth Warren has dubbed Mr. Warsh as President Trump’s “sock puppet,” the man was quick to respond noting that he most definitely is not.
I guess we’ll have to wait and see what the first big move in the Warsh era will be. Will it be an interest rate cut or a hike? Given where things stand today, it feels like there are few options that make sense other than a hike.
It’s a tough time to be the Fed chair
With the dual blockage in the Strait of Hormuz, still-high oil prices (at around $90 per barrel), and the threat of $150-160 oil in a tough inventory-depletion scenario, it feels like inflation remains the beast to be slain first. After the U.S. labor market added 172,000 jobs in the month of May, employment looks to be in a far better spot than anticipated.
And with stock markets nosediving following the print, with the Nasdaq 100 actually crashing 4.8% in a session, it feels like an interest rate hike has already dealt a left hook straight to the chin of the market, with the tech sector taking on the brunt of the damage.
But will Warsh actually hike, even given President Trump’s preference for rate cuts? That’s the big question, but it feels like the market isn’t buying that Warsh is a “sock puppet.”
A hot jobs number and inflation make the chance of a rate cut incredibly slim
Any way you look at it, the latest slate of jobs numbers, the potential fuel for inflation that is higher oil prices, and Mr. Warsh’s hawkish history, it’s not looking good for those who are hoping for rate cuts in the second half of the year.
As for how President Trump will react, I don’t think he’ll criticize Mr. Warsh too harshly this early into the man’s term. After all, he’s inheriting a very tough situation, with the ongoing Iran war (and perhaps the threat of $160 oil), lingering inflation, and employment that’s so robust that any slim hopes for a rate cut have seemingly been shot down.
Rate hikes in the cards? Why it’s not a serious concern
In my humble opinion, perhaps there’s no other move other than to increase interest rates. With the stock markets already reacting so negatively, I think a pretty strong case could be made that stocks could take an even bigger hit if dealt a surprise blow, such as a rate pause or cut.
Indeed, markets can react in quite mysterious ways. In the meantime, I’d look to stay the course as an investor. Even if rate hikes are on tap over the short- to medium-term, perhaps things could shift in a way such that rate cuts will be back on the table.
It might not take all too long for an Iran peace deal to be struck, as inflation falls back to earth, and the rise of agentic AI starts to eat into employment. Not to mention the potential structural disinflation that serious AI productivity and monetization gains could pave the way for.
The bottom line
Any way you look at it, I think a few hikes are necessary medicine to make it through the current tough environment. After that, perhaps the stage is set for a nice rate-cutting cycle, perhaps one that brings us to depths not seen since the COVID era.
In my view, Mr. Warsh can make the right moves while keeping President Trump happy, but things are going to take time.
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