It has become increasingly obvious that Kevin Warsh was Treasury Secretary Scott Bessent’s choice. Warsh has called for a closer relationship between the and the Treasury Department. Specifically, yield curve management and open market actions by the Fed would apparently be coordinated between the Fed and the Treasury Department. The Treasury yield curve is now the steepest in the past four years, so Treasury Secretary Bessent has been very successful in fixing the inverted Treasury yield curve that existed under his predecessor, Janet Yellen. It appears that when Warsh is confirmed as the next Fed Chairman, Bessent will become an even more influential Treasury Secretary, which will be crucial in helping the Fed to lower interest rates.
The Financial Times reported that some economists are skeptical of Fed Chairman nominee Kevin Warsh’s opinion that AI will be deflationary. Specifically, Warsh said that AI will trigger “the most productivity-enhancing wave of our lifetimes – past, present and future.” As a result, Warsh expects that the AI productivity wave will expand output and pave the way for the Fed to cut key interest rates without triggering a rise in prices. Naturally, these comments are going to make Warsh’s Senate confirmation hearing much more interesting.
The Commerce Department on Tuesday announced that in December were unchanged. However, November’s retail sales were revised up to 0.6% (up from 0.3% previous reported). Economists were expecting retail sales to rise 0.4% in December, so this report was disappointing. Due to the federal government shutdown, the Commerce Department is a month late with its data, and due to the substantial November upward revision, the retail sales data is not being taken as seriously as it has been in the past. Treasury yields declined after the retail sales report, which raises the odds of another Fed key interest rate cut.
The U.S. Navy seized the eighth crude oil tanker from Venezuela in the Indian Ocean after a month-long pursuit. Specifically, the Aquila II tried to evade the U.S. blockade of Venezuela. The fact that the U.S. Navy is now pursuing and seizing “shadow tankers” is expected to concern Iran and Russia, which have also been known to rely on such shadow tankers to transport crude oil despite sanctions.
The U.S. and Iran met in Oman to discuss dismantling Iran’s nuclear program. The U.S. wants Tehran to (1) stop from enriching uranium, (2) curb its ballistic missile program, and (3) end its support for regional proxies that destabilize the Middle East. Iran has said it is willing to discuss only its nuclear work. Obviously, if these negotiations fail, the U.S. will conduct another military strike, which is why it has assembled a substantial Navy armada in the region. However, Iran did seize a couple of oil tankers prior to the negotiations and said the talks were “positive.”