What to expect from a Warsh-led Fed

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Alexa Hanelin: This morning, Kevin Warsh was sworn in as the 17th chair of the US Federal Reserve, succeeding Jerome Powell after his eight year tenure. What can we expect from a Warsh-led Fed? How will he strike a balance between the Fed's two mandates, anchoring inflation and achieving maximum employment and how will he navigate his relationship with the president who took an outsized interest in his predecessor Powell, who by the way will be staying on as governor after his term as chair ends. Welcome to J.P. Morgan's Making Sense. My name is Alexa Hannilin and in today's episode we'll hear from Michael Ferroli, J.P. Morgan's chief U.S. economist to answer these questions and more. Mike, thanks for joining us.

Mike Feroli: Thanks for having me.

Alexa Hanelin: First, let's talk a bit about Warsh’s philosophy. What do we know about him from his pre-appointment statements?

Mike Feroli: Well, it's a little confusing because when he was governor from 2006 to 2011, he at times was often perceived as being quite hawkish. Then as he was campaigning to become fed chair, he turned quite a bit more dovish in his statement. So we don't exactly know who the real Kevin Warsh is in terms of whether he's a hawk or a dove. And so we're just going to have to wait and see as the next couple months and years play out.

Alexa Hanelin: Let's talk a bit about the committee. So Powell is staying on the board. We had some hawkish statement descends in April. Would you categorize this committee as dovish leaning or hawkish leaning and what are some of the limitations of Warsh as chair?

Mike Feroli: Well, I think the direction of travel right now is clearly moving in a more hawkish direction. As you mentioned, we had those three dissents at the last meeting in late April all in favor of a less dovish forward guidance. We today heard from influential Governor Waller who joined those voices in saying they should move to a more neutral bias. So I think clearly we're moving toward a more hawkish committee than we saw just a few months ago. Of course, a lot of that has to deal with what's going on with energy prices feeding through into inflation concerns. But the committee will very much be a constraint on what Warsh can do. As I mentioned, you have now a few committee members already staking out quite a strong claim here in terms of where they want policy to go. Powell will be staying on. His voice will, at least even though he's going to be quite quiet publicly, I think within the committee, his voice will still carry a lot of weight. So I think Warsch is going to have to exercise a lot of interpersonal political skills here to exercise any influence on the committee.

Alexa Hanelin: Let's speak a bit about Fed communication and Fed guidance. We've heard a bit about Warsh's preferences for Fed forward guidance. How does it differ from what we saw with Powell and what are you expecting in terms of change and communication style?

Mike Feroli: Right. Here again, I think it'll be interesting to see how much Warsh's actions line up with the things Warsh said as he was auditioning to become Fed chair. And in particular, he has kind of said, he wants the Fed to kind of talk less and give less forward guidance. That being said, one of the things the post meeting press conference really does is allow the chair to have the first word coming out of each meeting and to really set the narrative for the rest of the intermeating period. So I doubt Warsh will want to take away or self-limit himself in exercising that very influential tool.I think the other things are, again, he may face a constraint from the committee. So if you wanted to take away the dots or to modify the dots, that would probably require a committee vote. And most participants probably want to keep the dots because that's one way they can put their voice out there. So again, I think you may hear relative to what the things were said before becoming chair, I think actually I expect less changes to actually come out of what we actually see. You could see the post meeting statement trim back some in terms of its length and so forth, but ultimately I suspect a year from now, Fed communications really won't look all that different from what they look like now.

Alexa Hanelin: And given all the uncertainty in the next couple of months, the market's given Warsh some time to wait and see and may add more optionality or flexibility.

Mike Feroli: Yeah. I would also add the administration seems to be giving Warsh a little more flexibility. I think there was a lot of expectations the president would come in and really urge, let's say, Warsh to cut rates. And we've already heard from some administration officials like Kevin Hassett and Scott Bessent that even they can see now is not a right time to cut rates.

Alexa Hanelin: This may be a difficult question to answer, but we just touched on it. Warsh was nominated partially because Trump wanted lower rates and now we're in this sort of separate inflationary environment. So how do you expect Warsh to navigate that tension? Does he even have room to cut given what we're seeing now?

Mike Feroli: Right. So I wouldn't characterize it as whether he has room to cut, but whether they, the committee, the various members of the committee have room to cut. And in this economic environment, it's a really tough sell I think to say that policy needs to be easier. Inflation's running high, the labor market is looking solid or at least fine and just this morning we saw longer run inflation expectations move up quite dramatically. So I think the case for rate cuts anytime soon is a nonstarter.

Alexa Hanelin: Warsh has argued that AI could unlock this massive productivity gain and that would ease inflation pressure. Do you buy that narrative and how much of that could influence Fed decisions?

Mike Feroli: So in a word, no. There's actually not much really strong evidence, I should say, that higher productivity growth necessarily lowers inflation. Certainly in the last cycle we saw that low productivity growth didn't raise inflation. We had low productivity growth with very low inflation. And as Chair Powell pointed out in the March press conference, there's actually a lot of considerations here. So for one, the data center build out is raising electricity prices, it's raising consumer electronic prices. Another feature here is that higher productivity growth should raise the real neutral interest rate and also called R Star, meaning that normal interest rates should be higher in any given environment. So that's another consideration here, which again, many people on the FOMC have made in their public statements. And so I don't think this is going to be a novel argument that they haven't thought about.

Alexa Hanelin: We've had a couple questions on the desk around the Fed changing their inflation targets or using a trim mean of sorts and Kevin Warsh mentioned that as well. What probability are you putting on that outcome?

Mike Feroli: Yeah, very low. This is not, again, this like the productivity discussion is not new to a new debate to the FOMC. They've considered at times a whole host of what we would call robust measures of inflation like trim mean, median. I mean the regional FOMC ... I'm sorry, the regional reserve banks probably produce about a half dozen of these different measures. First of all, maybe I should back up and say that PCE inflation is their goal. That's not going to change and what we're really talking about is intermediate goals, whether it should be X food and energy core, trim mean, median, et cetera. Those are all going to influence the decision, but this isn't going to change the ... It's not going to be a game changer for thinking about policy.

Alexa Hanelin: Thanks, Mike. Let's quickly talk about balance sheet. Warsh has long advocated for tighter balance sheet policy. How does that play out?

Mike Feroli: So one consideration here is that the size of the balance sheet is going to be constrained by the demand for the Fed's liabilities. We're probably in an environment where we're operating with a balance sheet that's about as small as it can get given bank demand for reserves. Now there can be changes here in Fed regulatory policy that could over time lower bank demand for reserves. But two things I would point out here first, that is again, many of these would require committee or at least board decisions, the Federal Reserve Board, the seven in Washington. And the second thing is that these are going to take time, right? I don't think this is a 2026 story, probably isn't even a 2027 story.

Alexa Hanelin: Mike, can you touch on recent concerns about Fed independence given Trump's influence and how do you see Warsh threading that needle?

Mike Feroli: So part of this goes back to understanding or guessing who the real Kevin Warsh is, but another thing I would point out is we are awaiting a decision probably sometime soon from the Supreme Court regarding the case of the attempted firing of Governor Lisa Cook. It is most court watchers expect that the court will rule in favor of Cook being able to keep her job and having secure job security and cannot be fired by the president. If that is indeed the case, then that should bolster Warsh's ability to withstand any pressure from the president and do whatever he thinks is right.

Alexa Hanelin: All right, Mike, last question for you. What are we expecting for the June FOMC meeting?

Mike Feroli: So first thing I'd say is we still have May employment and CPI before the June meeting, but barring some big surprise in either of those data points, I would say the two things to watch for are weather the committee drops that dovish bias we mentioned earlier. Again, after Waller's comments today, I think it seems pretty likely they would shift to a more neutral bias or just drop any forward guidance altogether. And then the other thing to watch for is going to be the dots, the last set of dots, which were released in March. The median participant looked for one cut this year and again, barring any surprise in the upcoming data, I would expect the median would shift to looking for no cuts this year. And as far as our call, we have been and continue to look for no cuts this year and we think the next move will be a hike in the second half of next year.

Alexa Hanelin: Fantastic. Well, I think that's a great place to wrap it up. Thanks, Mike, for the time and we look forward to speaking to you all in a couple weeks at the May jobs report.

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