Kevin Warsh has been sworn in as the new Federal Reserve Chair, but outgoing Chair Jerome Powell has chosen to remain on the Fed Board of Governors, breaking with the modern custom that departing Fed chairs leave the Board rather than remain as potential rival power centers [1]. The article warns that Powell could garner enough Board support to act as a 'Fed Shadow Chair' and potentially force a series of rate hikes, even as Warsh assumes leadership [1].
The opinion piece argues that even a single rate hike would be an inappropriate response to the current oil-price shock, referencing historical precedents where former Fed Chairs Alan Greenspan and Ben Bernanke responded to similar supply shocks by cutting or holding rates steady rather than hiking them [1]. The author emphasizes that the Federal Reserve cannot address supply-side issues such as oil production or shipping constraints through monetary policy, and that a rate hike would instead exacerbate vulnerabilities in the economy, particularly in housing, manufacturing, and small-business credit [1].
Current financial conditions are already tight, with the 30-year Treasury yield above 5% and the ten-year yield above 4.5%, leading to higher mortgage rates, corporate borrowing costs, and pressure on duration-sensitive assets [1]. The article notes that recent inflation data does not justify aggressive rate hikes: core PPI was reported at 4.4% and core CPI at 2.8%, suggesting that the inflation is primarily energy-led and not a demand-side emergency [1].
The author concludes that further rate hikes would add a credit shock to an existing energy shock, warning that such a move could further weaken housing, tighten financial conditions, and pressure exporters due to a stronger dollar [1].
CONCLUSION
The article expresses strong concern that Jerome Powell's continued presence on the Fed Board could lead to unnecessary rate hikes under the new chair, Kevin Warsh, especially in the context of an oil shock. With financial conditions already tight and inflation data not warranting aggressive action, the market takeaway is that further rate hikes could significantly harm jobs, housing, and economic growth.