It was a quiet week on the economic data calendar, giving financial markets an opportunity to digest a torrent of developments on the earnings, political and policy front. The Fed interest rate announcement took a backseat, with the FOMC predictably holding the policy rate steady, while maintaining its cutting bias. But the bigger news was President Trump’s nominating Kevin Warsh to be the new Fed Chair (see commentary). More recently, Warsh has struck a relatively dovish tone, but historically he has leaned more hawkish. Financial market reaction is somewhat mixed. Equities have turned modestly lower – and look to the end the week in the red – while the yield curve has steepened by several basis points. Meanwhile, gold gave back most of its gains from earlier in the week, while the greenback suffered a second straight week of declines (see commentary) and has now slipped by 2.7% since mid-January (Chart 1).  

As of writing, it looks like the White House and Senate leaders have reached a deal to avert another government shutdown… well, sort of. The “deal” will extend funding for five of the six agencies through September 30th. Funding for the Department of Homeland Security, which includes Immigration and Customs Enforcement (ICE), will be split off from the larger appropriations package and will only extend through February 13th. This will allow Congress more time to negotiate new policy measures on the current ICE deployment. 

However, the funding bill will need to return to the House for another vote, which won’t happen until Monday, so there will be a brief lapse in appropriations over the weekend. Provided the revised bill passes without issue, the disruptions will be small. However, should passage in the House be delayed, and the shutdown drags on for even a few days, then it’s very likely that the January employment report – scheduled for release on Friday February 6th – will be delayed. 

Turning to the Fed announcement, there was little doubt that the FOMC would hold the policy rate steady. For investors, the focus was more on tweaks to the statement and the press conference to get a better sense of forward guidance. Changes to the statement (see commentary) largely reflected a “mark-to-market” on current conditions. The assessment on economic activity was upgraded to “solid” (previously “moderate”), while the reference to the downside risks to the labor market were removed. During the press conference, Powell characterized the current policy stance as “roughly appropriate and not significantly restrictive”. Translation: the FOMC sees reduced risks to both sides of its dual mandate, suggesting less need for further policy action. 

Importantly, Fed futures barely budged following President Trump’s announcement that he is nominating Warsh to be the new Fed chair – with two cuts still priced by year-end (Chart 2). For the time being, concerns surrounding Fed independence have been tempered. But rest assured – if confirmed by the Senate – market participants will parse every word over the coming months as Warsh shadows Chair Powell.