Fed: Policy focus and leadership change – DBS

Philip Wee of DBS Bank discusses the Federal Reserve’s expected decision to keep the Fed Funds Rate unchanged while Jerome Powell holds his final press conference as Chair. He notes Kevin Warsh’s emphasis on trimmed-mean inflation and AI-driven productivity, and highlights shifting political dynamics that have cleared the way for Warsh’s confirmation and altered Powell’s calculus about remaining as Governor.

Warsh paradigm and Powell exit

"Jerome Powell will conduct his final press conference as Fed Chair following the expected decision to maintain the Fed Funds Rate at 3.50-3.75%."

"The calculus for Powell staying on as a Governor until January 2028 has shifted significantly with the Department of Justice’s decision on April 24 to drop its probe into the Fed's building renovations, moving Republican Senator Thom Tillis from blocking to endorsing Warsh on April 26."

"Warsh appeared to divert the current war-related energy shock by shifting the Fed’s focus away from core PCE inflation toward trimmed-mean inflation and AI productivity gains, alongside a barbell strategy of lower rates and balance-sheet reduction."

"His strategy is reminiscent of Alan Greenspan’s shift towards the Core PCE deflator, which ran lower than CPI, to justify a more accommodative stance during the productivity gains of the 1990s."

"USD will lose its haven premium should surprises point to a possible oil supply glut that supports the incoming Fed Chair’s paradigm shift."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)