May was defined by the long-anticipated changing of the guard at the Federal Reserve as the Senate confirmed Kevin Warsh as the seventeenth chair of the Federal Reserve in a 54-45 vote, the closest margin in the modern era. Jerome Powell, who had led the Fed since 2018, chose to remain on the Board of Governors as part of the transition. Equity markets held firm near their all-time highs through the transition, supported by the tail end of a strong earnings season, even as consumer sentiment slid to historic lows under the weight of higher prices at the pump.
The complication for the new chair is that the inflation picture has shifted significantly since the beginning of the year when the broad consensus was that the Fed would be lowering interest rates. April’s CPI report showed headline inflation accelerating to 3.8% year-over-year, the fastest pace since 2023, with energy accounting for more than 40% of the monthly increase as the lingering effects of the Iran conflict continued to work through gasoline and goods prices. This presents an awkward inheritance for Warsh, who came into the role having argued there was room to lower rates, in part on the back of AI-driven productivity gains. The market has repriced accordingly: where the debate earlier this year centered on the timing of cuts, futures now point to rates holding steady through year-end, and a growing minority of participants have begun to price in the possibility of a hike.
The tension we have flagged in prior commentary, between a softening labor market and the inflationary pulse from the energy shock, has now moved squarely to the center of the policy debate, and it is the variable we will be watching most closely in the months ahead. For now, hiring remains muted while inflation reasserts itself, leaving the Fed with little room to maneuver in either direction. We continue to favor large-cap equities over their smaller counterparts and maintain our preference for credit risk over duration risk on the fixed income side. We will be watching the next Federal Reserve meeting closely in mid-June as additional economic data will be available for updated outlooks.
Source: https://www.bls.gov/news.release/cpi.nr0.htm
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