The economic decisions front is not a data print; it is leadership and independence at the Fed. Kevin Warsh, nominated by President Trump for the Fed Chair, finds himself in the middle of a Senate confirmation process that is already impacting investor expectations for monetary policy. On an operational note, when there is fear of Fed Chairman appointment being political, inflation expectations will increase, rates and yields can rise, even without Fed hikes, as bond markets price that possibility.
It is important because the Fed’s mandate has both a technical and a credibility aspect. Weakening of the latter can be reflected in terms of higher funding costs, stronger US currency and greater volatility in stock and credit markets. This creates problems for the central bank’s reaction function – pre-emptive cuts can lead to a resurgence of inflation expectations, whereas overly restrictive policy creates risks of a recession. A politically contentious confirmation process adds to uncertainty when the economy is exposed to energy and supply side factors.
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