Yardeni Research | No Swan Song for Powell

💡Kevin Warsh, as President Trump’s nominee, would likely lean towards a more dovish monetary policy, pushing for aggressive easing, especially influenced by the President's pressure. In contrast, Jerome Powell maintains a data-dependent approach, which would lead to less aggressive rate cuts or a more cautious stance, aiming for a single 25bps cut in the second half of the year if data cooperates. Warsh's approach might be guided by an optimistic outlook for productivity, potentially leading to more rate cuts than Powell would favor in similar economic scenarios.

💡The primary obstacle delaying Kevin Warsh's confirmation as the next Fed Chair is Senator Thom Tillis (R., NC), who is blocking the nomination until the Department of Justice drops its criminal investigation of current Fed Chair Jerome Powell. The probe centers on alleged

💡In the 'Roaring 2020s resumed' scenario, Warsh would likely push for more aggressive easing, potentially advocating for a bigger rate cut or a small one combined with very dovish forward guidance, driven by his optimistic outlook for productivity. Powell, conversely, would remain data-dependent, favoring one rate cut for the remainder of the year. The text suggests that if confirmed in time, Warsh might push for two cuts over the rest of the year, compared to Powell's likely one cut, demonstrating a key distinction in the aggressiveness of their easing moves.

💡The 'No landing' scenario is defined by a short-lived Iran war but an economy so resilient that inflation remains persistently above the Fed's 2.0% target. This persistent inflation is attributed to the oil shock exerting upward pressure on other prices, with oil prices fluctuating between $80 and $100 per barrel, boosted by an estimated $20 risk premium due to ongoing Middle East tensions. In this environment, the economy avoids a slowdown, but inflation pressures continue to be a significant concern for monetary policy.

💡Kevin Warsh would likely dissent from the FOMC consensus in a 'No landing' economic scenario because he would face intense pressure from President Trump to push the Committee to ease, despite inflation remaining well above the Fed's 2.0% target. In this situation, the majority of FOMC participants, including Powell, would not advocate for a rate cut. Such a dissent would be highly controversial, as no Fed chair in the modern era, dating back to 1936, has cast a dissenting vote against a policy decision while serving as chair.

💡The 'Stagflating 1970s Redux' scenario is characterized by a prolonged Iran war, leading the Fed into a stagflationary environment akin to the 1970s. This includes an ongoing oil price shock that simultaneously exerts upward pressure on inflation and downward pressure on economic activity, resulting in similar CPI inflation peaks to the 1970s. This environment suggests a

💡Both Powell and Warsh would likely err on the side of easing in a stagflationary environment, prioritizing downside risks to the labor market over inflation risks as prolonged high oil prices destroy demand. They would both probably consider the inflation from the oil supply shock as transitory. However, Warsh would advocate for more aggressive rate cuts due to his bullish outlook for productivity, while convincing the Committee to ease aggressively in such an environment would be challenging, given historical lessons from former Fed Chair Arthur Burns' politically influenced easing during the 1970s oil shock.

💡Jerome Powell downplayed the significance of the March SEP projections due to the unusually high uncertainty surrounding the duration and magnitude of the negative oil price shock stemming from the Iran war. He explicitly stated that if the Fed were ever to skip an SEP, this would be a compelling instance to do so, indicating that the projections primarily reflected data released up to that point rather than a comprehensive, forward-looking assessment incorporating the war's potential economic consequences.

💡Recent inflation data, including the January PCED report showing sticky and elevated core and headline inflation, and the February PPI surprising to the upside for a third consecutive month, indicate a concerning and persistent inflationary environment. The FOMC's consensus inflation forecast for the PCED price index was revised higher, expecting 2.7% y/y for 2026, and the Fed's 2.0% target is not projected to be reached before 2028, suggesting continued upside pressure.

💡According to the SEP, the FOMC currently projects inflation to reach its 2.0% target not before 2028. The consensus of FOMC meeting participants revised the PCED price index forecast higher to 2.7% year-over-year for 2026, indicating that inflation is expected to remain above target for a considerable period, extending beyond 2026 and 2027.