Author: Davis Finke, CFA
On Wednesday, Kevin Warsh was confirmed by the U.S. Senate as the next Federal Reserve chair, succeeding Jerome Powell. Warsh previously served on the Federal Reserve Board of Governors from 2006 to 2011 and has since been vocal about his vision for a Fed that plays a smaller role in financial markets and relies primarily on interest rate adjustments to manage inflation. While President Trump has been clear about his desire for lower interest rates, Warsh assumes the role at a time when rising inflation pressures make it increasingly difficult for the Fed to justify cutting rates in the near term.
This week brought the release of several closely watched inflation measures. The Consumer Price Index (CPI) rose 3.8% year-over-year in April, up from 3.3% in March and the highest reading since May 2023. Energy costs were a major contributor, with gasoline up 28.4% and fuel oil up 54.3% from a year earlier. Core CPI, which excludes the volatile food and energy categories, rose 2.8% year-over-year in April. Price increases were seen in shelter, medical care, airline fares, household furnishings and operations, and recreation. As a result of this recent data, markets are now pricing in a 75% chance of a rate hike over the next 12 months, which would ultimately increase borrowing costs for consumers and further strain consumer spending.
Despite the hotter-than-expected inflation data, the S&P 500 and Nasdaq set record highs on Thursday. However, after the summit between President Trump and Chinese leader Xi Jinping ended with little progress on issues related to Iran and the Strait of Hormuz, markets declined sharply on Friday. While some investors had hoped that China would exert pressure on Iran to reach a deal with the U.S., no such signal emerged. As a result, U.S. Treasury yields surged and Brent crude climbed back near $110 per barrel, reflecting concern that disruptions tied to the Strait of Hormuz may not be resolved soon.
