Market Reactions to Senate Hearing for Fed Chair Candidate
Before yesterday’s Senate hearing with Federal Reserve Chair nominee Kevin Warsh, markets seemed to anticipate stability, and that turned out to be accurate. Warsh was firm about the Fed’s independence, which helped avoid a decline in Treasury values, but he was vague enough on policy matters to keep interest rate expectations in check. There are a few noteworthy aspects to consider. Warsh mentioned the need for a “new framework” for the Fed, likely hinting at reducing the balance sheet, although he didn’t give specifics. He also stood by his AI-driven productivity theory, suggesting it might lead to lower interest rates, and expressed skepticism toward forward guidance.
Looking beyond the hearing, Warsh’s confirmation seems contingent on Sen. Thom Tillis being satisfied with the way Jerome Powell has managed a criminal investigation. A potential solution could involve shifting the investigation from the Justice Department to Congress, something Tillis appears open to. However, it’s still possible that Warsh won’t be confirmed by his term’s end on May 15; yet, if he takes over the chair position before the FOMC meeting on June 17, it shouldn’t pose a significant problem.
During Warsh’s testimony, the dollar experienced several fluctuations, mostly trending upwards but ending relatively stable. Headlines surrounding the Federal Reserve remain ambiguous. President Trump announced a cease-fire extension at the last minute, which suggests some optimism, but it hasn’t made a noticeable impact on the US dollar, despite the approaching deadline. Meanwhile, tensions in the Strait of Hormuz remain unresolved, as the US blockade continues and reports emerged of a British container ship being targeted by Iranian forces yesterday.
A crucial factor for a more robust dollar rebound appears to hinge on stock performance. The S&P 500 has risen about 3% since the war began, and MSCI World is up about 1%, yet European stocks haven’t lagged as much as might have been expected, which could drive the EUR/USD lower. In this context of relatively strong risk sentiment, the DXY might find it difficult to reach the 99.0 level.
Today’s data from the US looks sparse. Yesterday, alongside robust sales figures for March, ADP payrolls showed a significant weekly increase for the second consecutive year. The four-week moving average currently stands at 54,750, indicating a monthly rise of over 200,000. However, other labor market indicators lack similar strength, and given the limited correlation between ADP’s weekly figures and the NFP as well as its own monthly data, market participants may remain cautious in interpreting these results.
