The Day After the Fed Rate Hike, Financial Markets Applaud Kevin Warsh, Who Keeps Trump’s Confidence

So first things first. The Fed raised its target rate by a quarter of a point, in Chairman Kevin Warsh’s quest to reduce the inflation rate he inherited from President Biden and Chairman Jay Powell, to at least 2 percent, and perhaps moving it toward zero, from more than 3 percent.And then in the next 24 hours, financial markets applauded.Let’s go first to the inflation compensation so-called CPI break evens in the TIPS market — Treasury Inflation-Protected Securities — that fell across the board, in some cases by as much as 8 to 10 basis points, that’s one, one hundredth of a point — which is a very big deal for those securities.It means that investors are demanding less inflation protection, or put another way, inflation fears and future expectations of inflation, are lower. So score one for Mr. Warsh.Short rate up, long rates down. Just what the doctor ordered.And another security, the 5-year forward Treasury also dropped in yield, a sign that future inflation will be lower than current inflation. All good.In the cash market, the 10-year Treasury dropped from slightly over 5 percent, down to 4.94 percent as of this reporting.The dollar index went up, and so did the stock market.Today’s S&P 500 is up 1.1 percent.Very good.Now here’s a great trick: Mr. Warsh pulled this off not only with the backing of the financial markets, but keeping the confidence of President Trump.“Do you still have confidence in the fed chair Kevin Warsh?” a reporter asked Mr. Trump. “Yeah I do,” the president replied. “Well, I am relying on Kevin, but he’s got, you know, a very tough board, he’s got a board that was put there by a lot of other people and the interest rates are too high — they are not appropriate.”Not only that, but Mr. Trump wants Mr. Warsh to be independent. As he put it: “I think — I want him to be independent, but it’s my opinion and I’m very good at this stuff, interest rates are too high. We should have the lowest interest rates anywhere in the world because we have the best credit.”Well Mr. Trump may be right. Then you have all these anklebiters in the press saying there’s little modern precedent for the Fed chairman consulting with the president.This is nonsense. First of all, Mr. Warsh spoke to the president literally just moments before the Fed announced its rate hike. In other words, the decision by the Central Bank was already made.Second, Fed chairmen should talk to the president. He’s the president. He appointed the chairman. It’s his economic policy.Now, many years ago it was alleged that Chairman Arthur Burns shifted to easy money at President Nixon’s request. Perhaps. Perhaps not.More constructively, Chairman Paul Volcker slayed inflation while President Reagan lowered tax rates.And still later, Chairman Alan Greenspan consulted with President George H.W. Bush, and then President Clinton, to coordinate monetary policy with fiscal and budget policy. In other words, that is trading off deficit reduction plans for lower interest rates.During the financial crash, Chairman Ben Bernanke consulted with President George W. Bush and practically lived with Treasury Secretary Hank Paulson. Chairwoman Janet Yellen consulted with President Obama and she even met with Mr. Trump.Indeed Fed chairmen not only are constantly meeting with the Treasury secretary, who represents the president, but also they meet with the director of the National Economic Council.And finally, the big question now is how Mr. Warsh is going to move inflation, down to 2 percent, and perhaps even to zero, from more than 3 percent.So I have a modest suggestion: shrink the Fed’s balance sheet, called the monetary base, and work with the Treasury to make the dollar, King Dollar, once again. Just sayin’.From Mr. Kudlow’s broadcast on Fox Business Network.

The Day After the Fed Rate Hike, Financial Markets Applaud Kevin Warsh, Who Keeps Trump’s Confidence

The Day After the Fed Rate Hike, Financial Markets Applaud Kevin Warsh, Who Keeps Trump’s Confidence

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