This post was originally published on this site.
The nomination of Kevin Warsh as Federal Reserve Chair is mildly hawkish, as he’s not the outright dove that Kevin Hassett could have been. But then again, Warsh could be seen as less Trump-impacted, and thereby more impactful. Even if Warsh did turn out to be a MAGA dove, it’s still unlikely that the overall FOMC turns MAGA dovish. At best, President Trump could turn four board members MAGA dovish – Warsh, Jerome Powell’s replacement (only if he leaves), Lisa Cook’s replacement (only if she is fired) and one retirement later in 2026. That’s four at the very best. The rest, which is eight out of 12, would be pure data watchers. Overall, the maths suggests that the data will decide on rates, not the president.
As it is, there are about two rate cuts discounted, and we agree with this – it’s been our view since the beginning of the year. But nothing for the foreseeable future. Chair Powell was, in our view, remarkably balanced in his commentary at last week’s FOMC meeting, and is in no mood to cut (nor hike). He could well go through the rest of his term without changing rates again. We then have two 25bp cuts expected in June and September, and that’s it for the cuts. The macroeconomy is vulnerable, but displaying enough resilience to avert a recessionary tendency through 2026.
The interesting dynamic from the liquidity-plumbing perspective is talk of balance-sheet reduction. The current FOMC members tend to hold their collective noses and prefer to maintain the excess bank reserves system. It’s easier to stick with it, and tough to undo. But it seems that Kevin Warsh intends to make a go of it. If so, we’d need to be on alert to some potential liquidity hiccups along the way, and certainly some teething issues. We’ll opine more on this as we see a clearer plan of action.