A new broom - Global market update

In 2011 at the Cannes Film Festival, cinema goers were treated to the release of a psychological thriller, based on a book written in 2005, staring Tilda Swinton as a mother strugglingwith her son and the mass murders of his fellow high school students that he committed. Although it received positive reviews from the critics, it never hit the highs of a major awards nomination. Last week, investors played their part in an identically named production as everyone agreed that “We Need to Talk About Kevin” – but in this case they were referring to Kevin Warsh, who took the mantle as Chair of the US Federal Reserve (Fed) at his first meeting.

Given the long run into his debut, it is probably fair to say that it wasn’t going to go anything like the way that he envisaged when first nominated in late January. The backdrop of the Iran conflict has become so entrenched that it is easy to forget where the narrative was when Kevin Warsh was nominated on January 30th. The assumption was that he was being installed in the Fed to cut rates, and his views on artificial intelligence (AI) productivity and the ongoing level of restriction provided an intellectual foundation for trying to do just that. Instead, the inflationary impact of the oil price rise has shifted expectations for June 2027 higher by some 0.75% since his nomination.

With such a significant change in the landscape over the last few months, heading into the meeting many in the market saw little reason to engage in huge-conviction trading, particularly as very few knew what his messaging to the market was going to look like – was he going to follow his predecessor and submit a dot to the Fed’s favourite ‘dot-plot’ model? While he had stated his intention to change some aspects of how the Fed operates, as with most things involving the US administration these days, we were very light on detail!

Taking into account all the noise around inflation and the apparent improvement in the labour market, the most likely outcome for the Fed for the remainder of 2026 was seen to be that it would remain on hold. While Warsh would presumably have preferred to maintain an easing bias, the balance of opinion on the committee was likely to convince him that he too should keep an open mind about how things will play out going forward.

When the meeting concluded, investors were left with two major observations – he is a man that is economical with his words, cutting the committee’s statement from 341 to 130 words, and he refused even to leave his own dot on the Fed’s plot of members’ projections for interest rates in the future. The stripped-down message makes plain that Warsh isn’t going to keep up the policy of forward guidance.

Its very brevity comes across as a surprisingly strong statement of hawkish intent, and there’s nothing in there to open up any excuse to cut rates, particularly as the Fed’s 2% target rate for inflation remains in place. Many believed that it has been tacitly abandoned, and a 3% target would have made it easier to cut rates, as President Donald Trump wants, but Warsh, it appears, is not going there. As such, he appears to have succeeded in demonstrating that he isn’t there just to do the president’s bidding and cut rates.

As to the longer-term outlook for what the Fed will look like under his stewardship, Warsh announced five task forces to cover the areas of communication; the balance sheet/operating system; alternative data sources; productivity, jobs and artificial intelligence; and the inflation framework. The task forces might not report until the end of the year, so this is more a declaration of intent than anything else, but it certainly suggests change is on the way.

There was never any chance of a move in interest rates this week, but the ‘peace deal’ with Iran could have given him scope to duck the hard questions and give him optionality – but he didn’t take that. He certainly surprised the markets, and possibly his colleagues and the president who appointed him. If he means to continue as he has started, then markets may have more surprises to come as the ‘easy’ information flow that investors have become accustomed to with prior Feds dries up.

And if that happens, then there might be a hell of a lot more for us to talk about on Kevin!!