For a long time, Kevin Hassett, one of Trump’s most loyal allies and a staunch advocate of faster interest rate cuts, was considered by many to be the leading candidate to replace Jerome Powell as Fed chair. However, the markets were not very enthusiastic about this idea. Hassett’s appointment would have been seen as a direct blow to the Fed’s institutional independence, which is why the DXY came under pressure.
Last week, though, Hassett’s chances dropped sharply, and a new alternative emerged on the horizon: Kevin Warsh. This came after Donald Trump commented that he values Hassett’s role in the White House and does not want to lose him. Apparently, the president was advised that it would be more difficult for Congress to approve Hassett’s appointment and that the markets would likely react more favorably to Warsh’s nomination.
Would Warsh submit to Trump’s wishes?
Given the US president’s December statement that “anyone who disagrees” with him would never head the Federal Reserve, the answer would appear to be yes. However, although Warsh also favors rate cuts, institutional credibility is not a secondary concern for him. That means Warsh is much less likely to implement policies by presidential order. His decisions would be based on macroeconomic data, not political pressure.
And for now the macro backdrop argues for patience:
Inflation remains contained, albeit persistent, with December CPI meeting expectations at 0.3% month-on-month and 2.7% year-on-year, while core inflation came in below forecasts at 0.2% month-on-month and 2.6% year-on-year.
On the other hand, the labor market continues to show resilience. Initial jobless claims fell unexpectedly, dropping by 9,000 to 198,000 in the week ending January 10, below the Reuters consensus of 215,000.
This helps explain the strengthening of the US dollar index last week, even despite President Trump’s statements on Greenland and the deterioration of relations with the EU.
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