Tom Lee/Fundstrat. Thoughts on the new Fed Chair:
Incoming Fed Chair, Kevin Warsh, will be sworn in on Friday. This will end a week where we view the equity market having survived a meaningful test — namely, oil surging to near highs and US bond yields at multi-year highs:
- Kevin Warsh was nominated and confirmed within the timeline of the most recent Fed Chairs, around 70 days. In other words, Congress and the White House agreed upon his chairmanship and there was not any required horse trading, nor multiple candidates proposed before Warsh was picked.
- As he takes on this role, Kevin Warsh, in our view, will have these 5 challenges ahead:
1. Oil vs AI: which matters more to structural inflation?
2. Future Fed guidance: Warsh prefers to eliminate guidance.
3. Fed vs Hawkish markets: Warsh sees less structural inflation vs markets.
4. Fed vs “Dovish” White House: Managing a key relationship as White House prefers more cuts.
5. Stock market is the economy: Wealth effect.
- Regarding Oil vs AI, the question is which of these forces becomes dominant and therefore is where Fed focuses its policy tools:
– High oil today has the effect of pushing up inflation, which means possible future hikes
– The April FOMC minutes show the Fed would consider hikes if inflation persists >2%
– AI, while maybe short-term inflationary (due to energy and chips) is arguably deflationary given its impact on employment and even the future wages of workers
– thus, AI would give the Fed a dovish bias
– timing is key and which of these forces becomes the primary narrative is key
- Warsh stated in his Senate hearings that he believes the FOMC should eliminate guidance and thus enabling the Fed to have all available information before making a policy decision. This vacuum of information will likely cause markets to rely on proxy measures, including prediction markets and bond market (Fed futures). While this will help the Fed to understand where “the market” stands, this also could put the Fed in conflict with market positioning. This will be an important challenge over the next few years.
- There is not a lot that needs to be said around the Fed and White House. This will be an important channel for Warsh to navigate. We will have to see how this dynamic works.
- And finally, regarding equities. Prior Fed Chairs have publicly stated that they do not pay attention to equity markets and levels. But the stock market has proven to be a leading indicator for the economy and exerts a lot of influence on the business cycle, business confidence, consumer confidence and even the liquidity of the bond market. And the White House cares about the equity markets as well. So we will see how Warsh communicates and interacts with the equity markets.
