Now this looks like a job for me
Last week’s headlines thankfully took a hiatus from the destruction of war and placed the Federal Reserve (Fed) back in the spotlight. After concerns that his nomination would be blocked, Kevin Warsh,
President Trump’s nominee to be the next chair of the Fed, won the backing of the Senate Banking Committee on a 13 to 11 party-line vote, putting him on track to be confirmed by the full Senate before Jerome Powell’s term ends on May 15. Republican Senator Thom Tillis kept his word to not hold up Warsh’s nomination after the Department of Justice dropped a criminal probe into cost overruns for the Fed’s renovation of its headquarters.
Still, Warsh’s likely ascendancy at the Fed may still come with controversy. In the past, Warsh has called for a smaller Fed balance sheet, as well as new ways for the Federal Open Market Committee (FOMC) to think about inflation; he has also argued that Fed officials provide financial markets with too much guidance on where policy is headed. “Taken together, this [Warsh’s outlook] points to a more centralized, less transparent and potentially more politically exposed policy framework,” warned Gregory Daco, chief economist at EY-Parthenon.
“Forward guidance” is a tool used by the Fed to let the public know of its probable future course of action. Policymakers introduced this tool in the early 2000s, under then Fed Chair Ben Bernanke. But Bernanke’s predecessor, Alan Greenspan, had a very different approach to communicating Fed policy, perhaps one more closely aligned with Warsh. Below are three indicative quotes from Greenspan (who also recently joined Bob Hope, Jimmy Carter, and Dick Van Dyke as a centenarian):
- “I know you think you understand what you thought I said. But I’m not sure you realize that what you heard is not what I meant”
- “If I say something which you understand fully in this regard, I probably made a mistake.”
- “If I seem unduly clear to you, you must have misunderstood what I said.”
The FOMC left interest rates unchanged last week, yet the committee nevertheless revealed strong division among its ranks. The elephant in the room causing uncertainty is, of course, the conflict in the Middle East; but labor and inflation do not present a clear picture on the economy’s direction, either.
Four FOMC officials voted against the decision to hold rates steady, including three who objected to language in the Fed’s post-meeting statement that suggested the central bank would eventually resume cutting rates. The three—Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lorie Logan— “supported maintaining the target range for the federal funds rate but did not support inclusion of an easing bias in the statement at this time,” the committee said.
“I believe the FOMC should offer a policy outlook that signals that the next rate change could be either a cut or a hike, depending on how the economy evolves,” wrote Minneapolis Fed president Neel Kashkari on Friday. “This could tighten financial conditions somewhat today, pushing back against a high-inflation scenario that could require an even stronger monetary policy response in the future.”
Hammack commented: “Uncertainty around the economic outlook has increased in 2026 and makes the future path for monetary policy more uncertain as well … I see this clear easing bias as no longer appropriate, given the outlook.” She reiterated that the economy has thus far been resilient and that rising oil prices pose more risk to broad-based inflationary pressures. Meanwhile, Governor Stephen Miran, the fourth dissenter, instead called for a quarter-point reduction in rates.
Today, the FOMC seems to be tilting to the hawkish side, with the most dissents since October 1992. Powell said they reflected the fact that the center of the committee “is moving toward a more neutral place.” But, he added, “a majority of us didn’t feel like we needed to send a signal on that right now.” Or, stated differently, the majority of the committee no longer favor rate cuts in the near term.
Mizuho Securities published its view on the hawk/dove divide at the Fed. Figure 1 compares this view with what Mizuho published (referenced in a previous Talking Points) before the latest FOMC meeting.
Regarding his future on the board, Powell stated his intention to serve as Fed governor for a period of time “to be determined.” He reiterated his intention to stay due to the personal attacks against him by Trump, as well as due to the White House’s broader pressure on the Fed. Powell added that his goal is to support the incoming chair Warsh as he transitions into the role.
Powell further stated that the role of a governor on the board is to advise the chair on how to achieve consensus and deflect outside influence, which Powell has had plenty of experience doing in recent years. Powell also refuted the idea that his decision to stay on as governor was motivated by a desire to deny Trump the ability to appoint a new governor (presumably one who is more dovish, like Miran).
In the meantime, the economic front has become far trickier to forecast, due to downstream effects from the Iran war. Last week, for example, saw the release of the Personal Consumption Expenditures price index, the day after the FOMC meeting. The PCE rose by 3.5% in March, up from February’s 2.8% pace (Figure 2). The major contributor to this jump was, unsurprisingly, gasoline and other energy goods.
Inflationary pressures have been building, albeit more slowly heading into this latest PCE report; whether the increases are transitory is unknown. The shutdown of the Strait of Hormuz and the inability to resume oil production could prolong current pressures in the economic data.
Market participants seem to be following Powell’s view that the recent runup in energy costs is a short-term concern. One-year breakeven rates—which are calculated by using the inflation-adjusted linked maturity from the yield of a nominal Treasury of a similar maturity—show just 3.23%. That number signals that the market thinks prices will remain high for a year but are well off the highs of a month ago; the market may also view an amicable truce approaching to end the Iran war. Similarly, the five-year inflation swap five years forward, a gauge of longer-term inflationary expectations, has been steady (Figure 3).
Fortunately, the current volatility of the marketplace has led most observers to believe that the Fed will have no choice but to stand pat and wait for more inflation before raising rates. So far, officials have been fairly resolute in waiting for additional data, and the market has come around to pricing the foreseeable future as such. Figure 4 shows that the effective range for federal funds rate futures contracts over the next 10 months remains within the 3.50 to 3.75% band.
Overall, last week was fairly positive for markets: The hurdles for the next Fed chair were removed, the war didn’t escalate further, and the market got its latest glimpse of the inflationary picture, which met expectations. Now, the labor market will be the next lynch pin to determine the appropriate path for monetary policy.
If labor stays buoyant, albeit at its declining longer-term rate, the Fed can afford to take a more patient approach. But if the opposite occurs, and labor market weakness becomes apparent, the resulting stagflation environment will lead to a more divided Fed and more uncertain monetary policy.
In the latter scenario, the economic waters will be extremely murky. Given Warsh’s propensity to communicate less with the public, chair of the FOMC might just be the perfect job for him.
FROM THE DESK
Agency CMBS — Last week saw an uptick in Fannie Mae origination volume, with $850 million coming to market. Spreads were unchanged throughout the week, as Treasury markets remained rangebound. Ginnie Mae volumes remained light, with the desk only trading one PL and CL. Ginnie spreads were flat to one basis point wider.
Municipals — AAA tax-exempt yields moved higher throughout the yield curve, week over week. Primary new issuance was down, with the Fed meeting held last week. Even with a lower-than-normal calendar, we saw deals get done. However, we did not see many repricing of deals tighter. Weakness, especially on the front end of the yield curve, led investors to put in small orders on transactions relative to a year ago, when investors commonly went in for the whole deal. Investors put $615 million into funds last week, while high-yield funds saw $30 million of those inflows.
The information contained herein, including any expression of opinion, has been obtained from, or is based upon, resources believed to be reliable, but is not guaranteed as to accuracy or completeness. This is not intended to be an offer to buy or sell or a solicitation of an offer to buy or sell securities, if any referred to herein. Lument Securities, LLC may from time to time have a position in one or more of any securities mentioned herein. Lument Securities, LLC or one of its affiliates may from time to time perform investment banking or other business for any company mentioned.
