For Better or Warsh

Summary

Andrew Sheets and Seth Carpenter discuss Kevin Warsh's nomination as Fed chair, emphasizing that Warsh is a known, mainstream pick and that the FOMC's committee structure limits any single chair's power. Seth explains the challenges facing a new chair, including above-target inflation, a weak labor market, solid aggregate demand, and debates over AI productivity versus inflation psychology. Andrew reviews client questions and market reaction, noting dollar stability, a possible steeper curve, and uncertainty about Warsh's policy leadership.

• Kevin Warsh's Fed chair nomination was not a surprise and is viewed as within mainstream policy.
• The Fed chair leads a committee, so policy outcomes require FOMC consensus rather than unilateral control.
• Market pricing implies a year-end funds rate around 3.2%, close to Morgan Stanley's house view.
• Inflation is above target, while labor data is weak but aggregate spending remains solid.
• AI-driven productivity could be disinflationary and support lower rates; persistent inflation could shift psychology.
• Market reaction to Warsh has included a higher dollar, lower precious metals, and stable equities and credit.
• Investors may lean into Fed easing and a steeper U.S. Treasury curve for now.
• Warsh's leadership style and response to unexpected data remain key unknowns.