On Friday, US President Donald Trump swore in the new Chair of the Federal Reserve, Kevin Warsh, while investors waited with bated breath for any comments he would give on monetary policy. The ceremony was unusual in that it was held at the White House, as traders tried to read symbolism into the event to gauge how much Trump’s preference for lower rates would affect policy.
However, anyone looking for some major announcement or change was likely disappointed. Warsh’s comments were highly technical, and Trump urged the Federal Reserve’s independence. This meant that potential changes under the new management at the Fed could be more subtle and happen behind the scenes.
Odds of a Hike Keep Rising
After the ceremony, the market continued to increase the odds that the Fed’s next move will be a rate hike. By Friday evening, the market was pricing in an almost 70% chance of a 25 bps increase in interest rates by year’s end, and it could come as soon as July. All eyes are now on the June meeting, which will be the first presided over by Warsh, as he faces down an increasingly hawkish FOMC.
As the US economy recovers and the job market surges, there are fewer and fewer technical arguments for keeping rates unchanged, let alone cutting them. This will make it harder for Kevin Warsh to take a more dovish stance, even if he wanted to. But, following his speech, some analysts are growing increasingly convinced that Warsh might not be as dovish as initially suspected.
What Will Warsh Change at the Fed?
As Chair of the FOMC, Warsh does not set monetary policy; he has only one vote out of twelve. However, he can help steer the debate and build consensus among the members. After an increasing amount of dissents in the final months of Powell’s tenure, markets might be looking for a more unified outlook from the Fed. Though growing divisionism might be hard to avoid.
Where the Chair has more influence is in the Fed’s communication style, and this is where Warsh has already indicated changes. In his acceptance speech, he suggested he wanted to move away from backwards-looking economic dogmas and achieve stronger growth. This can be broadly interpreted as being less interested in accumulated data and more focused on getting ahead of economic trends. The focus on stronger growth implies a preference for lower rates.
The Market is Pushing for Higher Rates
Bond yields have risen as traders price in the risk of higher inflation. This is a signal to markets that interest-rate pressure will be to the upside. However, Warsh’s biggest change might not be in interest rates but in the balance sheet. He comes from a similar school of thought as Treasury Secretary Scott Bessent, that the Fed shouldn’t be in the issue of managing the government’s debt.
That means reducing the Fed’s balance sheet, something that he mentioned in his acceptance speech. The Fed had paused its balance sheet reduction amid concerns over market liquidity. But running off the debt would have the practical effect of tightening monetary policy and helping bring inflation under control. It might be a way for Kevin Warsh to achieve higher rates without actually raising the official rate, and to navigate the narrow space between markets wanting hawkishness and Trump wanting dovishness.
![Credit Card 160×600 [EN]](https://assets.iorbex.com/blog/wp-content/uploads/2023/06/13144507/Blog-Banner_EN-Banner_160X600X2.webp)
