Assessing a potential resolution to the Iran war, market resilience and Fed Chair nominee Kevin Warsh’s policy stance.
This week in Boston started with Marathon Monday, always a perfect metaphor for being an investor. The 26.2-mile run from Hopkinton to a finish line right at the doorstep of RWA’s headquarters on Boylston Street in the Back Bay features a challenging, hilly course, including the so-called “Heartbreak Hill” at mile 20 that has caused many of even the most skilled athletes to hit the wall. It takes both physical and mental strength to persevere through it, and as we cheered on Monday, some 28,506 runners achieved their goal and won our hearts for their endurance.
We all know financial markets offer peaks and troughs along with heartbreak and hope. Jumping into the race when the course is clear and level sometimes feels like the most reasonable thing to do. But we miss out on the mile-by-mile achievements that come from running the full course with that approach. And, as anyone who has watched or run the race knows, you do not run alone. The best part of the marathon is seeing how the runners support each other, how their loved ones and spectators help keep their momentum going, and the way the city itself pulses with pride and strength for them to finish, and finish Boston Strong.
I mention all this because, as we close another week of market action with stocks back at their highs, the world still unsettled and headlines challenging our nerves, we have to dig deep to stay on course.
On-again, off-again ceasefires are not what we hoped for, but that is where we are. While the war has not ended, we would seem to be in a de-escalation phase, or perhaps the beginning of the end. Economic and military pressures are having an impact on Iran, as well as their own internal tensions, but they are also pretty dug in around control of the Strait of Hormuz, and nuclear compromises are likely to be only temporary if Iran gets its way. We obviously have different ideas, but progress has been made in that both sides want to explore a solution that limits further economic damage. That narrative could shift swiftly though, so we must be mindful and prepared with your more imminent cash needs for spending out of the crosshairs of volatile market swings.
In addition to blockbuster earnings reports like Intel’s that have powered stocks to maintain highs, the market has turned its attention to Washington D.C. to watch the confirmation hearings of Federal Reserve Chairman nominee Kevin Warsh. Warsh is well known to investors, having served five years on the Federal Reserve Board of Governors from 2006 to 2011 at the height of the Great Financial Crisis.
While previously known as an inflation hawk, Warsh has raised eyebrows by calling for a “regime change” at the Fed and saying that it’s time to lower interest rates. During the hearing, there was a considerable focus on Federal Reserve independence, with some accusing him of “flip flopping” on rates as the White House shifted from a Democratic to a Republican president. Warsh said that he never agreed to cut rates or to a specific pathway for rates, nor did President Trump ever ask him for such a commitment. “The president never asked me to predetermine, commit, fix, decide on any interest rate decision, in any of our discussions, nor would I ever agree to do so,” Warsh remarked.
Notably, this week President Trump said he would be disappointed if Warsh didn’t cut rates right away, and later stated, “We should be… we should have the lowest interest rate in the world. When I was a young guy growing up, we always had the lowest interest rate worldwide. We always did.”
While the markets deem Warsh a serious and worthy candidate, and would welcome him given his experience, his confirmation was challenged by Republican Senator Thom Tillis of North Carolina, who vowed to block any Fed nominee until the Justice Department ends its criminal investigation into Fed Chairman Jerome Powell. Recall, the administration has been looking into the ongoing renovation of the Federal Reserve building that began in 2022, and which is allegedly millions of dollars over budget. Powell, meanwhile, has accused the administration of launching the investigation in retaliation for refusing to lower interest rates as much or as quickly as the White House demanded. In today’s news, the Justice Department dropped the investigation, presumably clearing a path for Warsh’s confirmation.
On a final note about the Fed, nominee Warsh has identified revamping inflation metrics as “one of the first reforms” he would target at the Fed, if confirmed. Suggesting the data does a poor job of capturing the “underlying inflation rate,” Warsh pointed to a number of frustrations, including the long lag before the changes in home prices are reflected in the CPI, or the discrepancy between “imputed” prices elevating the personal consumption expenditures index versus softer “market-based” price estimates. As such, Warsh has proposed turning to his preferred measure, called trimmed averages, which essentially eliminates the largest increases and the largest declines (or smallest gains) in prices from the calculation.
Maybe that change would give Warsh and the committee cover to cut interest rates. We shall see, but at next week’s Fed meeting, no change is likely. With more earnings reports on the way, there will be a lot for the market to digest, but we expect the market momentum to hold and maybe even advance in this marathon we call investing.
Written by a human.