The wait is over, and President Trump has nominated Kevin Warsh to head the Federal Reserve. To better appreciate Warsh’s views on monetary policy and what they may entail for markets, we summarize a recent Wall Street Journal editorial he wrote, The Federal Reserve’s Broken Leadership. Our market-related thoughts are below the bullet points.
- Warsh believes that AI will unleash a productivity boom, leading to higher real wages, a lower debt-to-GDP ratio, and “be a significant disinflationary force, increasing productivity and bolstering American competitiveness.“
- He wants to redirect lending from speculative uses to productive ones. “Money on Wall Street is too easy, and credit on Main Street is too tight. The Fed’s bloated balance sheet, designed to support the biggest firms in a bygone crisis era, can be reduced significantly.”
- Changing banking regulations to level the playing field between small and large banks. “The Fed’s rules and regulations have systematically disadvantaged small and medium-sized banks, which has slowed the flow of credit to the real economy.“
From a market perspective, Warsh’s quote, “the Fed’s bloated balance sheet,” will make him appear hawkish to some. Beyond the editorial, he has stated on numerous other occasions that he doesn’t support QE unless under dire circumstances. That said, his opinion on the benefits of AI, favoring productivity over speculation, and his forecast of higher real wages, makes a case for disinflation and strong economic growth, which should provide for lower interest rates and a strong economic tailwind for asset prices.
It’s worth noting that Warsh was a Fed Governor during the financial crisis (2006-2011). He voted for the bank bailouts and the initial round of QE, as well as the more questionable second round.
The Week Ahead
We have another active week ahead with earnings from some large companies and the monthly round of employment data.
Starting with economic data, the ISM manufacturing on Monday and the services survey on Wednesday will provide updates on corporate sentiment and their views on inflation and the labor market. On the labor front, on Monday, on Tuesday, and the BLS report on Friday are expected to show slightly better job growth, but still well below the employment-population growth rate.
To wit, the BLS is expected to show 70k net , but the population of employable people is growing by roughly double that.
The top earnings announcements this week are as follows:
- Monday: Palantir (NASDAQ:PLTR) and
- Tuesday: , , and
- Wednesday: Google, , , and
- Thursday:
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