In my 40-plus years in this business, I’ve seen new Federal Reserve Chairmen and Chairwomen routinely tested by the market. Just look at the performance of the S&P 500 Index (^SPX) in Chairman Powell's first year. That said, I think the market narrative around Kevin Warsh is just wrong, maintains Nancy Tengler, CIO of Laffer Tengler Investments.
He is very clear on his plan and we think it involves the balance sheet (in our view a much more humane way to tighten financial conditions). His opening statement after the recent Fed meeting noted clearly that the committee discussed how much accommodation was coming from the balance sheet. Balance sheet expansion leads goods inflation by about a year, so shrinking it is important to containing inflation.
Treasury Yield Curve
I also think all the handwringing today around the move up in yield for the 30-year Treasury is misplaced. Yields in the important part of the curve (2s/10s) have actually come in recently. Is it possible that Chairman Warsh is letting the market steepen the yield curve for him? Very Greenspan-esque in our view.
We have argued for a long time that robust stock returns can coexist with higher interest rates. The 1990s are instructive for two reasons: productivity and Warsh's understanding of the disinflationary power of productivity-driven growth (à la Greenspan). The 10-year averaged 6.66% during the decade. Today's 4.5% 10-year is hardly an obstacle to equity returns.
This too shall pass. We think Chairman Warsh is on the right track.
