Kevin Warsh’s Fed chair hearing in front of the Senate Banking Committee has been scheduled for 10am ET on Tuesday this week. While we expect he will maintain this narrative about the economy, recent developments have weakened the case for lower rates – labor-market data have stabilized, PCE inflation has surprised to the upside, and the war in Iran poses further upside risks to inflation. The nuance for Warsh will be how he balances a desire to lower rates over time with an economic backdrop that does not call for rate cuts at present. As of writing, we are not sure if the Senate Banking Committee hearing on Tuesday actually takes place. Senator Tim Scott (R-SC and chair of the Banking Committee) could postpone it if he thinks that would send a sharper message to Trump that without ending the DOJ investigation into Powell, there is no path ahead for Kevin Warsh's senate vote confirmation. If the hearing does take place, we expect Warsh to be quizzed on overall Fed independence, independence of the reserve banks, scope for rate cuts, change in FOMC communications, timeline on balance sheet changes & his own views on if Powell should continue at Fed as a governor. Given steadfast indications from Senator Tillis (R, North Carolina) that he will block any Fed nominees in the SBC until the DoJ investigation of Powell and the Fed has been resolved, we do not expect Warsh's nomination to make it to the Senate floor for a vote. The likelihood of this outcome was amplified this week by the president, who indicated that he has no intention to call off the DoJ investigation of Powell. These delays likely imply that the Warsh confirmation will remain stalled past May 14, when Powell's term as board chair ends. In our view, the most likely outcome is that Powell will remain Chair of the Board of Governors, and the FOMC, until Warsh's confirmation can proceed. The president stated this week that he would "fire" Powell if he remained in office beyond his official term,11 which we interpret as a signal that he intends to appoint an interim board chair from among the current board governors (likely Miran). His legal authority to do so is questionable and will likely be met with a court challenge. Even if Trump successfully inserts an interim board chair, our view is that Powell would most likely remain as chair of the FOMC. This is because the FOMC elects its own chair and, in January, designated Powell for this role, on a pro-tempore basis. To summarise, Next week’s confirmation hearing for Kevin Warsh will likely give him a platform to reiterate his views that rates should be cut, in part, as he argues for a reduction in the Fed balance sheet. No vote is likely to be taken, and Warsh will probably not be confirmed when Chair Powell’s term expires next month. We see no material policy change under a new chair who has only one vote and will need to mend fences and build credibility within the committee.
