Beyond the confirmation and timely appointment of Kevin Warsh, Middle East conflicts have emerged as a new variable influencing the Federal Reserve's policy outlook. The Middle East turmoil has disrupted the Fed's rhythm.
According to informed sources, the Senate Banking Committee hearing for Federal Reserve Chair nominee Kevin Warsh, originally scheduled for April 16, will not proceed as planned. Committee members responsible for reviewing Warsh's nomination have not yet received all required documents needed to schedule the hearing.
In January, U.S. President Trump announced his nomination of former Federal Reserve Governor Kevin Warsh to succeed current Chair Jerome Powell, whose term expires on May 15. Powell previously stated that if Warsh is not confirmed by then, he would continue serving as "interim chair."
Warsh served as a Fed governor from 2006 to 2011 and has publicly criticized the side effects of quantitative easing, advocating for closer policy coordination between the Federal Reserve and the U.S. Treasury. However, the same sources indicated that while Warsh's hearing will be postponed, it is still expected to take place shortly.
The nomination faces additional hurdles. Under Senate Banking Committee rules, relevant notices must be issued one week before a hearing can be held, and the committee must first collect nominee documentation, including financial disclosure information. Warsh's financial situation may be particularly complex given that his wife is Jane Lauder, heiress to the Estée Lauder cosmetics fortune, with an estimated net worth of approximately $1.9 billion according to Forbes.
Financial disclosure documents submitted during Warsh's 2006 nomination for Fed governor revealed nearly 1,200 assets, most held by his wife. After leaving the Fed in 2011, Warsh worked for over a decade at Stanley Druckenmiller's family office, leading venture capital investments in technology companies including Palantir.
The Trump administration's original timeline aiming for Warsh to replace Powell by mid-May now appears challenging. Kevin Hassett, Director of the National Economic Council, expressed strong confidence on the 9th that Warsh would assume the position before Powell's term ends.
Furthermore, despite the administration's apparent confidence in Warsh's appointment, confirmation faces difficulty unless Republican Senator Thom Tillis of North Carolina withdraws his opposition. Tillis has declared he will not vote for any Fed nominee until the Justice Department drops its criminal investigation into Powell, which both Tillis and Powell characterize as a "political movement" undermining Fed independence. However, federal prosecutor Jeanine Pirro stated on the 8th that she plans to continue the investigation, casting uncertainty over Warsh's confirmation prospects even if his hearing occurs later.
Market attention remains focused on Warsh's policy stance. He has consistently advocated for reducing balance sheet size through measures like halting mortgage-backed security purchases to address excess liquidity, while simultaneously pushing for interest rate cuts to stimulate the economy. Warsh believes balance sheet reduction can curb inflation, creating room for rate cuts. However, balance sheet reduction constitutes tightening policy, conflicting with Trump's aggressive rate cut demands and potentially triggering market liquidity crises. Historical experience shows the Fed's 2019 balance sheet reduction operations caused a "collapse" in U.S. repo markets.
Additionally, Senator Elizabeth Warren sent a sharply worded public letter to Warsh on March 26, criticizing his performance during the 2008-2009 financial crisis and "Great Recession," accusing him of learning "nothing from failure" during his tenure as Fed governor from 2006-2011. Warren specifically questioned whether Warsh had learned from prioritizing Wall Street over American families, noting his oversight of excessive risk-taking before the subprime crisis, his advocacy for large financial institution bailouts during the crisis, and his opposition to strengthened regulations afterward. Warren predicted that Warsh's confirmation would rubber-stamp Trump's "Wall Street first" agenda.
Middle East ceasefire alters Fed policy expectations. Trump's nomination of Warsh and repeated criticism of Powell last year primarily aimed to advance aggressive rate cut policies. Beyond Warsh's confirmation timeline, Middle East conflicts represent another variable affecting Fed policy prospects. Following the two-week ceasefire agreement between the U.S. and Iran, investors have increased bets on Fed rate cuts.
According to CME data, probability for at least one rate cut by December jumped from 14% before the ceasefire announcement to 43%. When Middle East conflicts initially erupted, multiple analysts interviewed indicated that short-term inflationary pressures would cause markets to withdraw rate cut expectations and even anticipate hikes. However, as conflicts persist, inflation concerns would give way to recession risks, subsequently reviving rate cut expectations.
This pattern has materialized. Current Fed rate hike expectations have completely faded, though investors haven't returned to pre-conflict expectations of multiple cuts. Market participants view ceasefire agreement uncertainty as remaining high.
UBS Wealth Management's CIO office noted in their latest commentary that while the U.S., Israel and Iran initially agreed to a two-week ceasefire with Iran reopening the Strait of Hormuz, recent developments show the strait has closed again, demonstrating ceasefire fragility. Nevertheless, UBS maintains that negotiations under ceasefire conditions could improve agreement prospects and avoid escalation, with temporary ceasefires potentially extendable.
Prospects for resumed oil transit through the Strait of Hormuz could boost market sentiment, particularly for regions and sectors most sensitive to crude shortages, including Asia-Pacific and diesel/aviation fuel industries. Energy prices typically exert nonlinear impacts on economic growth, with oil prices exceeding $150/barrel potentially causing exponential negative effects. Current prices below $100/barrel, compared to approximately $120/barrel over the past two weeks, provide additional buffer space for markets and the economy, preventing negative impact accumulation.
Current energy prices remain slightly above pre-conflict levels but not significantly, suggesting central banks may not need to raise rates provided energy transport continues recovering. Moderately priced oil maintained over time could help reduce risks of rising consumer inflation expectations.
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