New Fed chair Kevin Warsh is about to take to the stage, and the market is going to get its initial feel for a new kind of communication style. Indeed, there’s a lot of uncertainty surrounding an FOMC meeting with a new Fed chair. After a rocky session of trade on Tuesday, it’s not out of the ordinary to think that there’s just a hint of lingering anxiety, especially with inflation becoming a bit of a problem again (rising to 4.2% in May) and the red-hot jobs number that initially rocked the semiconductor industry, the tech sector, and the broad market.
It felt like Warsh faced a tough situation going into his first FOMC speech as Fed chair, but with oil prices tumbling in recent sessions over the peace framework and hopes for a smooth reopening of the Strait of Hormuz, perhaps there’s room for optimism. Indeed, things can change quite quickly. But don’t count on Warsh, a man known to be a bit of an inflation hawk, to completely take rate hikes off the table.
Sure, the Trump administration might want cuts more than a hike or pause, but, at the end of the day, I think they’ll give the man time to settle into the job and do the right thing. If the peace framework goes somewhere, I do think that Warsh might have every reason to wait and see how things go.
Indeed, depending on what happens next in the Middle East, oil could be lower or back above $100 per barrel again. With that much uncertainty, sometimes it makes the most sense to wait until the mist of uncertainty settles before charting the next course.
Will Warsh’s words soothe or cause anxiety in the AI trade?
As to whether Warsh will do the AI trade any favors, though, remains the big question. In my view, Warsh’s words will speak loudly. That is, of course, if we’re talking about no rate hike or cut made.
In any case, a data-driven approach seems wise, but the big question, at least in my view, is what the man will say about AI and its potential disinflationary impact.
At the end of the day, the long-term effect of a profound new technology, at least in my humble opinion, could matter more than a temporary spike in oil prices caused by a war that might soon be resolved peacefully.
In any case, market hopes remain high, even after the negative reaction to the overheated job numbers. If there’s any big takeaway from the hot jobs report, though, it’s that AI stocks could be the first of the dominoes to fall if higher rates really are on the table.
Since the Friday fumble in tech, things have been rather smooth, and the Space Exploration Technologies (NASDAQ:SPCX) IPO has gone perfectly, especially for Elon Musk and early buyers of the shares. That’s a big vote of confidence about growth and signals that investors are, in fact, still more than willing to take great risks for a shot at greater rewards.
How does AI factor into the big decision?
As Mr. Warsh steps up to the microphone, we’ll probably learn where the man really stands on AI and the oil shock caused by the Iran war. Given recent action in markets, it feels like the oil spike is likelier than not to be a blip rather than a reason to hike rates.
Of course, the Fed’s Lorie Logan has not shied away from expressing the view that the Fed might need to raise rates later in the year to fend off stubborn inflation. As for Warsh’s take, we’ll have to find out later today. Given how many moving parts there are with the end of the Iran war potentially in sight, holding steady is what I’d count on. The same goes for the withholding of the “dot” plot.
Beyond that, I’d look to see how Warsh views the impact of the AI boom on pricing. Yes, AI disinflation is a real phenomenon, but, for now, components needed to fuel the buildout have skyrocketed in price. Everything from DRAM to storage and more has made electronics incredibly expensive. Do these earlier days of the aggressive buildout change anything regarding the path forward with rates?
As for a bonanza post-meeting? Time will tell. Goodness knows that the slightest hint of a rate cut telegraph might be enough to cause a panic, especially in the most heated corners of the AI trade.
As such, I’d look for Warsh to telegraph less and use choice words, given his calculated communication style. That alone might lead to less volatility than would be typically expected from your typical FOMC meeting. For the AI trade, that’d be a win, in my books.
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