Las week, the US Senate confirmed Kevin Warsh’s appointment as the new Federal Reserve chair in a vote widely seen as the most partisan ever. All but one of the Democratic senators voted against him.
But is his appointment really so partisan? And what does it presage for US bond investments?
Warsh is known for his wish to pare back the Fed’s intervention in the markets, especially through purchase of securities, and shrink its balance sheet. In March 2011, he resigned from the central bank’s board of governors because he opposed a plan by Ben Bernanke, the then Fed chair, to purchase US$600 billion in Treasury securities.
Warsh has also spoken out in the past against the Fed’s forward guidance. “Market participants can place undue weight on Federal Reserve communications,” he told the Senate. Arguably, less forward guidance would give the central bank more flexibility to respond in real time to market conditions, though at the cost of less predictability.
That said, he has also advocated greater forward-looking economic analysis to assess actual inflationary conditions versus lagging indicators like the consumer price index. This certainly suggests continued tight focus on inflation, although some commentators say it may predispose the Warsh-led Fed towards rate cuts.
In line with his views on shorter-term, more responsive policymaking, Warsh has said that he favours more combative discussions within the Fed board and “messier meetings”. With his predecessor Jerome Powell’s unusual decision to stay on as a governor after he hands over the chair, dissenting voices are highly likely.
All these factors presage a higher risk and volatility premium for rate-dependent investments, especially Treasuries.
However, external events, especially geopolitical, are likely to impact US inflation and interest rate decisions far more than the Fed’s internal issues and personalities. Warsh has said he will be an “independent actor”.
He is at least qualified for the role, unlike other Trump administration appointees. Apart from being a former Fed board member, he was also former President George W. Bush’s special assistant for economic policy and executive secretary of the National Economic Council. He should have enough technical smarts to fulfill his brief as Fed chair – as long as he is left able to do it.
Attention will now turn to his debut Fed meeting on June 16-17 and what guidance, if any, he may offer for future interest rate policy. The rate views in the central bank’s Summary of Economic Projections have been criticised not just by Warsh as too close to policy promises. But will markets distinguish this from fealty to President Donald Trump?
