New Fed Chair Easing

NEWS: I will share my thoughts on the FOMC meeting on Wednesday June 18^th at 12:30 EST. Check the @Livesquawk X or Youtube sites for the link.

A new market narrative that seems to have taken hold last week is how the new Fed Chair will start easing aggressively once they start in May. We are seeing next June’s easing odds increase noticeably, and it is now almost 70% more likely than surrounding meetings to ease. Part of this will be the premium of “quarterly” meetings (Mar, Jun, Sep, Dec) over the nonquarterly meetings that we tend to see in the markets. However, I want to explain why I don’t see this scenario playing out anywhere near as likely as the markets think.

Below are the top 5 candidates the next FOMC chair from Polymarket. I find the site useful to get a sense of the market probabilities. The top 5 candidates can be summarized as follows:

Hassett 25% (shill),

Bessent 16% (shill),

Warsh 19% (hawk),

Shelton 13% (shill),

Lutnick 1% (shill).

Please explain to me how one of four shills or a hawk is going to have any impact on the voting of eases by the FOMC. Interest rate policy in the US is set by committee. The Fed Chair is only one vote of the 12 FOMC members. Maybe the markets are thinking about the Greenspan days where he would convince the other members to follow his lead. The big difference is that Greenspan was actually respected, and the independence of the Fed was not under attack. So I see a zero (or even negative, as there could be “revolt” votes) effect of this basket of Fed Chairs on an increased chance of an ease when they take power in May. Also, only a knucklehead would advocate for premature easing, as that would cause longer-end yields (which are more important to the economy than the front yields) to surge (see the eases last year). So unless eases are accompanied by something like Yield Curve Control (which must be instituted first), I think the narrative is flawed.

Below are my thoughts on the rest of last week’s news:

· We reached a mulligan with China. I can’t call that a deal. Trump needed a do-over and then needed to clarify the do-over. I thought Lutnick (?) said before the negotiations that the meeting would be quick, and it ended up taking three days. I didn’t hear Trump brag about anything new that we got so I am inferring that we got nothing new and the Chinese used those three days to extract what they could. #ArtoftheDeal I thought I saw a blurb saying the Chinese wanted to renegotiate after 6 months, so the US-China discussions will be ongoing, even at the mulligan level.

· Speaking of being uncertain about trade talk timing, I’m a little fuzzy about how hard certain deadlines are. We have a July 9^th deadline for all countries ex-China and an August 14 or so deadline for China. Bessent said there was a chance to extend tariff deadlines for countries that have “negotiated fairly.” A TACO extension is probably a coinflip for our major trade partners. I’m not sure if China’s deadline got extended in the mulligan (officially or unofficially). I don’t think Trump would want the rare earths cut off again. I lean towards thinking that Trump is going to be loud before the deadlines and be somewhat soft in extending them (TACO). But I leave open the possibility of Trump being tougher – especially if he has a tailwind from getting the tax and spending bill passed, which coincidentally has a soft deadline less than a week before the first tariff deadline.

· Trump will set unilateral tariffs for many countries in a week or two. We were never going to be able to negotiate that many trade deals, so this makes sense. I’m just curious how close the final tariffs on some countries are going to be to the April 2 tariff table, and if there will be any retaliation.

· Israel attacked Iran. I don’t think this affects the rates market that much, except for two things: (1) oil’s impact on inflation and inflation expectations and (2) a very small increased tail risk of terrorism. Given that inflation is a major concern for the Fed, higher oil prices will increase the risk of stagflation. That having been said, higher oil prices will revive some of the oil production that was reduced recently in the US. The Fed looks more at core inflation, but higher oil would have reverberations into core. I’m not sure the Iranians would want the wrath of Trump, but there are terrorist cells everywhere.