Fed outlook – "Elephant in the room" as Warsh nomination dominates backdrop

Now time to address the elephant in the room. Dominating the backdrop to this month’s meeting has been the 21st April confirmation hearing of Trump’s nominee for FOMC chair, Kevin Warsh, in which he laid his vision for sweeping changes at the Fed.

We see his remarks as having mixed implications for the dollar. The good news for markets is that Warsh seems dedicated to preserving central bank independence, with no suggestion that he will be at all compromised by the views of President Trump. Of course, it is difficult to take Warsh entirely at his word, particularly with Trump himself admitting that he would be "disappointed" if a Warsh-led Fed failed to deliver lower rates. While the remarks from the Trump nominee have been relatively encouraging thus far, the proof will, as ever, be in the pudding.

Warsh’s remarks that suggest a move away from asset purchases were seen as bullish for the dollar, although his plans for a ditching of forward guidance and a shift to a different inflation framework provide uncertainty and implications that are not so clear cut.

For now, Powell continues to command the room, and it could be a little while until we get a better idea as to what a Warsh-led Fed will actually look like, as his appointment is still to be ratified in the Senate. The assumption is that Warsh will lead the Fed in a more dovish direction than Powell, although we do not think that his appointment will dramatically change the path of US rates, given that he is but one of many voting members on the FOMC.