When Jerome Powell addresses the press on April 29, the focus will not be on the interest rate decision (no one currently expects a rate change). The real question is: How will the Fed act in the future?
Powell’s term as chairman formally ends on May 15. His nominee to succeed him, Kevin Warsh, testified before the Senate Banking Committee on April 21. Senator Thom Tillis, who had initially blocked the confirmation, dropped his opposition over the weekend – after the U.S. Department of Justice announced it would not pursue any further investigations against Powell.
The path is now clear for Warsh. But the future Fed chair is taking on a difficult legacy.
The labor market and inflation: The picture has changed
Headlines about the U.S. job market suggest strength: 178,000 new jobs created in March, with the unemployment rate holding steady at 4.3 percent. A closer look at the data, however, paints a far less reassuring picture.
Since January 2024, a single sector – health care and social assistance – has created about 1.7 million jobs. All other sectors combined – manufacturing, technology, finance, retail, and construction – have lost a net total of 56,000 jobs.
The engine behind employment growth is not the private sector, but government demand: Medicare, Medicaid, and ACA-driven spending programs.
What appears to be labor market strength is, in reality, fiscal policy in disguise. The nominal headlines mask a structural weakness that is already evident in wage data, hiring rates, and declining labor market mobility.
Inflation presents a mixed picture. The headline CPI jumped 0.9 percent month-over-month in March, driven almost exclusively by gasoline and energy prices.
Core CPI, on the other hand, rose by 0.2 percent – slightly less than expected – a figure that, if it continues, will bring the core PCE deflator down to 0.26 percent monthly.
The tariff effects from the previous year are fading from the year-over-year comparison. The trend is positive, even if the energy shock is masking it in the short term.
Warsh's inauguration will not be a smooth start
More interesting than the appointment itself is what comes next. If Warsh is confirmed on schedule, he will chair the June meeting on June 16–17 – his first as chairman.
The markets are currently not pricing in any interest rate cuts through the end of the year. We do not consider this expectation plausible. With Warsh at the helm – a long-standing advocate of low short-term interest rates coupled with balance sheet reduction – we see room for 2–3 rate cuts, especially if the labor market cools off in the summer and the oil price finds its way back below the $90 mark.
Whether Warsh can implement this agenda over the next four weeks will depend less on economic data than on the outcome of a political struggle in Washington. Investors should keep an eye on both.
Note: This text was translated using AI and may contain translation errors. The German version of the text is authoritative.