Who is the real Kevin Warsh?

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Good morning. Yesterday, Kevin Warsh got through the Senate Banking Committee hearing on his nomination as Federal Reserve chair without causing a Treasuries market meltdown. Well done to him. However, President Donald Trump’s pledge on CNBC not to drop a criminal probe into outgoing chair Jay Powell all but ensures that Warsh’s nomination will be held up at committee stage until a truce is brokered.

Elsewhere, Warshmania distracted us from budget car rental company Avis, whose shares have gone stratospheric. Pivoting to AI compute infrastructure? No, probably just a short squeeze. Are you shorting Avis? Tell us how your week is going: [email protected]. 

Warsh takes centre stage

Like a true central banker, Warsh delivered something for everybody.

In his hearing yesterday, he sidestepped multiple gotchas on his independence from Trump, including Senator Elizabeth Warren’s question about who won the 2020 presidential election. He also dodged questions about Trump’s probe into Powell and the attempt to fire Fed governor Lisa Cook.

These verbal acrobatics don’t leave the impression of a Fed contender who really speaks his own mind in defiance of Trump. But Warsh also emphasised that he has promised Trump nothing in terms of rates. In other words, he hasn’t cut a deal to get the job. 

“The president never asked me to predetermine, commit, fix, decide on any interest rate decision, in any of our discussions,” he told John Kennedy, the Republican senator from Louisiana. “Nor would I ever agree to do so.”

The market’s verdict: a little weakness in Treasuries, but within the range of the past few days and not out of whack with Bunds or gilts. Not a bad result for Warsh.

We also heard, but only a little, about Warsh’s desire for a rejig of the Fed, within the framework of the central bank “staying in its lane”: 

Milton Friedman had a statement that always stayed with me. He always worried about government officials that lured and hung around with what he called “the tyranny of the status quo”. Status quo practices and policies are especially harmful when the world is changing this fast . . . I believe a reform-oriented Fed can make a real difference to the American people. 

When pressed on his flip-flopping on interest rates — going from hawk during Democratic administrations to dove in the Trump era — Warsh circumvented a direct answer with a response on how “the supply side of the economy is changing dramatically”.

There was a bit more insight on his thinking when he was pressed on inflation. Interestingly, Warsh wasn’t asked about how he views the energy shock, but he did say he didn’t think tariffs were pushing up inflation, and his reasoning may hint at how he’d approach higher oil prices: 

What I’m most interested in is what’s the underlying inflation rate — not what’s the one-time change in prices because of a change in geopolitics, or a change in beef . . . Among the projects I would hope to undertake, one of the first reforms at the Fed, is a data project . . . A survey of a billion prices . . . What’s the change of the 500,000,001st price? Because that’s inflation . . . In a market economy, prices change all the time, and I don’t want to be confused by that.

This goes to the heart of Warsh’s proposed “regime change”. He is unhappy with balance sheet tools and calls for a “different new inflation framework”. He may be on to something here, but investors will be hoping he treads carefully — mucking about with inflation stats can backfire, for one thing, and is not great for credibility. Warsh’s disdain for the Fed’s current forecasting and communication methods may mean markets will have to brace for reduced visibility and more volatility. 

Unhedged is still unclear on what the essence of Warsh actually is. Prior Fed chairs each had their own style while maintaining continuity. Warsh, on the other hand, is emphasising change — but as economists say, it takes a model to beat a model. If you’re going to rip up the current playbook, you’d better have a better one, and it’s not clear that Warsh does.

(Hakyung Kim)

Transatlantic labour market pains

Last week, Unhedged wrote about the dire state of the US labour market. With net migration near zero and an ageing population, growth in the labour force could be nearly null. If that’s right, “almost all potential GDP growth will have to come from increased productivity”, we noted. This is pretty bleak.

On Friday, Fed governor Christopher Waller spoke about what this meant for monetary policy: 

I am going to have to get used to payroll numbers that are lower than I am accustomed to seeing in a growing economy as well as the possibility that even several months of negative payrolls may not be the warning sign of a recession that it often has been in the past.

Meanwhile in the UK, Tuesday’s jobs report came in much better than expected. Unemployment fell to 4.9 per cent in the three months to February, against consensus expectations that it would hold steady at 5.2 per cent. This was a “massive surprise”, according to Sanjay Raja at Deutsche Bank.

Weakening private sector wage growth — dropping to 3.2 per cent from 3.3 per cent in the three months to February — will also create one less area of uncertainty ahead of the Bank of England’s Monetary Policy Committee meeting next week.

On the face of it, the labour market in the UK should be better than in the US. After all, the country is not (yet?) subject to the Maga-lite immigration policies of Reform UK. But the UK is continuing to face high rates of labour force non-participation and low employment growth. Economic inactivity among 16- to 64-year-olds increased slightly to 21 per cent over the December-February survey period. There is no getting around it: the UK labour market is weak.

The bigger issue is that the UK’s labour market statistics continue to be unreliable. For those who haven’t been following along, the statistics agency is now six years into a data quality crisis. The labour force survey, which is the sole source of information on unemployment and economic inactivity, has been plagued by low response rates since the switch from in-person to telephone interviews during the Covid-19 pandemic. Last week, delivery of the transformed survey was delayed until 2027.

While the US is struggling with a shrinking workforce, the UK is struggling to count the one it has.

(Daire MacFadden)

One good read

Death of a merchant.

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