Ultra Hawkish Warsh Selection Creates Long Term Economic Risks

The expected nomination of the ultra-hawkish Kevin Warsh as Fed Chair creates long term risk for the economy as Warsh is a strict believer in the arbitrary and overly restrictive 2% inflation target.  He was a member of the Fed that increased rates 17 meetings in a row which precipitated the Great Financial Crisis.  Warsh was the only member of the FOMC that remained hawkish on inflation even after the GFC was well underway.  He actively opposed the QE that was undertaken to attempt to revive the economy.  Consequently, he is the most hawkish candidate for Fed Chair by far.  Warsh is a traditional Rhino Republican that focuses solely on the flawed 2% target and ignores the plight of the middle class.  Strict adherence to the 2% target severely limits nominal wage growth, creates unnecessary recessions and is a disaster for the middle class.

In the short run, we expect the Fed to cut 3 times this year as we are forecasting that PCE Core finally reflects the dramatic decline in market rents that is already reflected in real time inflation measures (See our publication of real time inflation at www.infracapfunds.com).  Consequently, even the overly hawkish Warsh will support rate cuts this year and is well positioned to implement short term rate cuts with the FOMC due to his historic hawkish outlook.  Due to our expectation that we will still get 3 cuts in 2026, we reiterate our bullish target on both bonds of 3.75% and on stocks with an S&P 500 Index target of 8,000.

The risk to the economy is longer term where Warsh’s adherence to the too low 2% target is likely to lead to the Fed needlessly raising rates when there is any blip in inflation due to transitory supply shocks or mismeasurement of inflation by the BLS.  The unnecessary rate increases will reduce economic growth and nominal wages and potentially lead to a deep recession as occurred after the mid-2000s aggressive tightening.