From the studio

Video: The AI Show | Opportunites amid software disruption and margin squeeze (4 mins)
Video: Investors Club | Staying positioned in US financials, US, and China tech (9 mins)
Video: Portfolio positioning amid US-Iran talks (5 mins)

Thought of the day

Kevin Warsh, US President Donald Trump’s pick to lead the Federal Reserve, will tell lawmakers at his Senate confirmation hearing today that he is “committed to ensuring that the conduct of monetary policy remains strictly independent,” according to his prepared remarks released on Monday. The hearing follows repeated calls from Trump for the Fed to cut rates despite growing inflation concerns linked to higher energy prices.

“I do not believe the operational independence of monetary policy is particularly threatened when elected officials—presidents, senators, or members of the House—state their views on interest rates,” Warsh will say in his opening statement to the Senate banking committee today. He will also tell senators that “Fed independence is largely up to the Fed,” but that “Fed independence is placed at greatest risk when it strays into fiscal and social policies where it has neither authority nor expertise.” Investors will also be looking for indications of his views on the path of interest rates and the Fed’s balance sheet.

While Warsh is nominated to replace current Fed Chair Jerome Powell when his term expires next month, the timing of his confirmation remains uncertain. Republican Senator Thom Tillis has stated that he will not advance the nomination until the Justice Department drops its criminal investigation against Powell.

But despite uncertainty surrounding the Fed leadership transition, we believe the US central bank remains on track for further easing later this year.

Core inflation is likely to cool as the year progresses. Minutes from the Fed’s policy meeting last month showed that a number of officials felt interest rate hikes might be needed to counter inflation, with a “vast majority of participants” judging that the risk of US inflation running persistently above target had increased. But price data for March showed that underlying inflation was milder than markets had expected. Analysis by the Dallas Fed also shows that the incremental price pressure due to rises in energy prices tends to fade quickly after a few months, and has little impact on core inflation. Our view is that cooling sequential core inflation in the coming months amid fading tariff effects should open the door to further rate cuts by the US central bank.

Softness in the labor market and moderating growth should also allow the Fed to ease. The Fed’s dual mandate of price stability and maximum employment means that policymakers are also attuned to softness in the jobs market. In fact, Fed officials warned about the vulnerability of the US labor market given the low rate of net job creation, pointing to the possibility that a further fall in labor demand could push the unemployment rate sharply higher. In the latest labor report, lower average weekly hours and decelerating wage growth reflected such demand-side soft spots. Additionally, while the US economy remains resilient, growth may slow more than the Fed currently expects in the second half of this year, prompting the central bank to act.

US monetary policy decisions are made collectively by the FOMC. The Fed sets rates through a 12-member committee, which comprises seven governors on the Fed board and a rotating cast of five of the 12 regional bank presidents. With the composition of the Fed board likely to become more dovish later this year, and a large majority of policymakers still favoring returning the policy rate closer to 3%, we believe the current market pricing of Fed policy is too hawkish.

So, we maintain the view that the Fed should cut rates by another 50 basis points toward the end of this year. Further easing should support equities and high-quality bonds over the medium term.