The Fed Has a New Head

Fed Leadership Change Calms Markets 

The big announcement this week was the nomination of Kevin Warsh to be the new Federal Reserve (Fed) Board Chairman. President Trump’s anticipated pick has been expected for several months and has been a long process. The final four candidates were interviewed multiple times by Treasury Secretary Bessent. President Trump tested the market’s reaction by name dropping them periodically and watching people’s reactions.  

Warsh Seen as Moderate Dove 

Kevin Warsh was a prior Fed Governor from 2006 to 2011. He successfully went through the confirmation process, which is already mired in politics. Even Republican Senator Thom Tillis has stated his intention to refuse his approval of any nominee while an active subpoena exists against current Fed Chair Jerome Powell.   

Markets knew any Trump nominee would be dovish and push for further rate cuts. Warsh is expected to be “less dovish” than the alternate nominees. This is calming to the markets who want an independent Federal Reserve. Warsh has been critical of current Fed operations and their monetary policies. He believes these policies led to the rise in inflation the past coupleyears.   

Shutdown Deal Supports Markets 

Another major boon for markets is the expected deal to avert a government shut down. All departments would be funded except for the Department of Homeland Security (DHS), which contains ICE and Border Patrol. DHS would have a 2-week stopgap bill to allow for further negotiations. The Senate voted on Friday, and the House expects to vote on Monday. 

Producer Price Index Runs Hot 

We had data come out this past Friday that was hotter than expected, with the wholesale Producer Price Index (PPI). This measures prices that are paid before they are sold to the consumer. These prices can be more volatile than consumer-facing prices as businesses can absorb some of the volatility without passing it on to consumers. 

December’s PPI showed headline inflation rose 0.5%, hotter than the 0.2% expected. Yearly, it remained at 3.0% when markets expected a decline to 2.7%. Core PPI, stripping out food and energy, rose 0.7%, which is much higher than the expected 0.2%. Yearly figures increased to 3.3% when markets expected a decline to 2.9%.  Most of the rise in PPI came from services, specifically machinery and equipment wholesaling margins. Goods prices were flat. Since most of the rise was in the one sector, markets took it in stride. 

FHFA Boosts MBS Demand 

The Federal Housing Finance Agency (FHFA) is the regulator that controls mortgage behemoths, Fannie Mae and Freddie Mac (agencies). They raised the limit on the amount of Mortgage-Backed Securities (MBS’s) that the agencies can hold in their portfolios. They are currently capped at $40 billion each, but the new limit will be a total of $450 billion combined. This allows them to purchase more MBS’s driving demand and push yields/rates lower. 

Fed Holds Rates Steady 

The Federal Reserve had their January meeting this week and as expected, they held rates steady. There were two dissents, both wanting to cut an additional 25bps. The Fed feel the economy is doing great, likely due to stronger GDP numbers. They aren’t that worried about labor markets and are still concerned with inflation being over their 2% target. This is a bit odd when you remove the lag in rent costs as well as the one-time tariff price hit.  Even Truflation said PCE should be at 1.39% because they look at 10 million data points versus the CPI and PCE’s 80,000. 

Consumer Confidence Hits 12-Year Low 

The January Consumer Confidence Index from the Conference Board fell to 84.5, the weakest reading in 12 years. The weakest sector of this index was labor. Amazon plans 16,000 job cuts and UPS announced 30,000 cuts. This doesn’t sound like a strong labor market.  

Looking Ahead: Jobs Week 

Next week is jobs week. These job reports look like they can definitely move rates. 

Tuesday, (February 3): Job Opening and Labor Turnovers (JOLTS) 

Wednesday, (February 4): ADP Employment Report 

Thursday, (February 5): Challenger Job Cuts, Jobless Claims 

Friday, (February 6): BLS Jobs Report