Guidance

Forward guidance when the policy rate is not zero is headed for the dust bin of history. The only hedge for the capex boom is cash, not non-tech sectors.

We begin this week’s note with perspective on the Warsh Fed and the similarities to Fed Chairman McChesney Martin’s unwind of World War II debt monetization. We then progress to the outlook for Warsh’s first meeting and address some of the misguided forecasts of rate hikes. We then move on to what we heard from retailers this week and why their struggles strengthened our risk reduction recommendation in last week’s note.

• Incoming Fed Chair Kevin Warsh will likely reduce the Federal Reserve’s interventionist policies, focusing less on manipulating long-term rates and more on restoring a “neutral” central bank approach similar to the William McChesney Martin era. We do not expect a robust debate about hiking the policy rate at the June meeting, but deep discussions around balance sheet policy, regulation, and forward guidance are probable. The first order of business is relegating forward guidance when the policy rate is not at the zero lower bound to the dustbin of history.

• The note highlights a growing tension within the Fed over the AI-driven investment boom, with some officials worried it could fuel inflation while others see it as productivity-enhancing and ultimately disinflationary. Raising rates to counter AI-related investment would risk harming employment and broader economic growth without solving supply-driven inflation pressures.

• The note also warns that higher energy costs are squeezing corporate profit margins and weakening consumer demand, especially in retail and consumer sectors as evidenced by cautious commentary from Target and Walmart this week.