Kevin Warsh is the new Chairman of the Federal Reserve, replacing Jerome Powell.  He served as a Governor on the Federal Reserve Board from 2006 through 2011, during the global financial crisis.  Prior to his nomination to this position, he frequently commented on monetary policy and inflation.  We are almost all old enough to remember when we didn’t even know the name of the Chairman of the Federal Reserve, much less have any idea what this person does.

The Federal Reserve has a dual mandate to promote maximum employment and maintain stable prices. Simultaneously. The tools the Fed has at its disposal are important, but limited to

  • Setting the target for the federal funds rate (interest rate banks charge each other for overnight loans)
  • Buying and selling U.S. Treasuries  (and sometimes mortgage-backed securities) to manage the money supply
  • Providing forward guidance, which is sometimes more influential than that actual Fed actions – particularly to the stock market

Although the Chairman sets the agenda for the meetings and shares information and decisions, the actual fed funds rate is decided by a vote of 12 members of the Federal Open Markets Committee which is a sub-set of the Federal Reserve.   So, although the Chairman’s words are important, he does not set the rate.

Next, let’s talk about what has changed and why it matters now.

No doubt that this is a challenging time for the Fed.  Inflation has been stubbornly above the Fed’s 2% long-term target while the unemployment rate has risen, although it is still well below historical averages.  Energy prices, tariffs, and geopolitical tensions have complicated the situation, but economic growth has been surprising robust.

Some experts have predicted that Warsh will favor an aggressive rate cut schedule because President Trump appointed him, while other Fed watchers expect that Warsh’s strong historical focus on inflation will be reflected in fewer rate cuts for the foreseeable future, with a possible hike before the year is over.  These fiscal hawks also believe that Warsh will push for a faster reduction in the Fed’s balance sheet/more aggressive sale of Treasuries which will reduce the money supply and slow economic growth, all in the name of inflation management.  For us as average investors, this likely means “higher for longer” rates which puts downward pressure on growth stocks and longer duration bonds.

Adding additional uncertainty is the expectation that Chair Warsh will be less likely to signal future policy moves in advance (forward guide) than Chair Powell did.  Those Wednesday afternoon press conferences after Fed meetings may no longer be “must watch” TV.  The question might become which thing markets dislike more – uncertainty or negative signaling.  We may find out.  Either way, volatility in bond yields and equity pricing might increase. 

As we step back here, history suggests that although Fed Chairs can create short-term market unease, long-term market performance is rarely tied to a single Fed official, chairman or otherwise.  So as usual, we are recommending discipline and planning, rather than trying to predict rate cuts. 

And now Wednesday afternoons after Fed Meetings are available on our calendars for you, instead of for Fed chair press conferences.  Sounds like a win to us.