The Dividend Cafe - The Latest on the Long Lost Fed

Episode Date: April 24, 2026

Today's Post - https://bahnsen.co/4w7lcrl The episode focuses on the Federal Reserve as Jerome Powell’s chair term approaches its May 15, 2026 end and President Trump’s nominee, Kevin Warsh, nears confirmation. The main hurdle had been a DOJ criminal investigation into alleged cost overruns at the Fed building renovation, which Senator Thom Tillis and other Republicans cited as grounds to pause Walsh’s nomination; the attorney general later dropped the criminal probe and referred the matter to the Fed inspector general, clearing the way for Senate Banking Committee action and a full Senate vote. Prediction markets and fed funds futures quickly repriced, with the probability of no rate cuts this year falling to about 62% and a meaningful chance of one cut remaining. David expects Warsh to argue oil is a supply shock outside monetary inflation, prioritize labor-market risks, and pair any rate cuts with tighter balance-sheet policy and reduced QE to improve price discovery and long-run market credibility. 00:00 Fed Returns to Spotlight 01:58 Powell Replacement Timeline 03:20 DOJ Probe and Senate Standoff 04:37 Investigation Dropped Breakthrough 06:52 Markets Reprice Rate Cuts 08:06 Forward Guidance and New Chair Uncertainty 10:43 Warsh Case for Cutting Rates 12:24 Balance Sheet Over Fed Funds 14:02 QE Exit and Fiscal Discipline 16:18 Market Credibility and Reform Hopes 18:18 Wrap Up and Next Week Preview Links mentioned in this episode: DividendCafe.com TheBahnsenGroup.com

Welcome to the Dividend Cafe, weekly market commentary focused on dividends in your portfolio and dividends in your understanding of economic life. Well, hello and welcome to the Dividend Cafe, where this week we are going to dive into one of my favorite topics in the world, the Fed, a topic that I have been deprived of being able to talk about lately because of all the necessary conversation around the Iran War and as well as AI and other topics that have just sort of pushed the Fed off of the front page and even off of the second page for a bit, but came back with a vengeance. this week because of the fact that we are finally after talking about it so much in months and years past at the point in which the placement of Chairman Jerome Powell is imminent. And today, Friday, the actual day in which I was sitting and writing Dividend Cafe when the news broke, we finally got the kind of breakthrough story that appears to set us on the right track to have the new chairman get confirmed. I'll explain the drama that was holding that back in a moment. But I want to talk about the Fed today, not just around the soap opera that is played out between

the Federal Reserve and the White House, but what it means to policy and what I'm expecting for interest rates in the very short term, which is, I suppose, what a lot of you may be interested in, what a lot of borrowers are interested in, and what a lot of market participants are thinking about. But I also want to talk about where my larger aspiration lies in the confirmation and soon-to-be active term of Kevin Warsh to be the new Federal Reserve Chair. So let me start with the drama and then we'll get into the policy side of it and pull some conclusions that I think are useful for all market participants, particularly those of you that are as interested in. in All Matters Fed as I am.

So here was the hang up. I think many of you may know this from the news, but I'll quickly do a just more detailed breakdown as to what exactly was transpiring. Chairman Powell was appointed to be the chairman of the Federal Reserve and, of course, confirmed by Senate, but appointed by President Trump back in 2017. Chairman Powell then had his term ending, and it does come to an end, his term as chairman will now end May 15th, 2006. His initial term ended in the middle of the Biden administration, but President Biden, after leaving him dangling for a little while, waited quite a bit,

but he did end up reappointing Chairman Powell. So that term now is coming to an end May 15th, 2026. President Trump announced in early February, and I wrote a Dividing Cafe the first week of February, why I was so happy with the pick. But after President Trump ran a sort of beauty pageant of his own for almost his whole first year of this new term, announced Kevin Warsh, former economist at Morgan Stanley, former Federal Reserve governor that had been appointed by President Bush in I believe 2006 to be the new chair of the Federal Reserve. And what happened is that President Trump has been in a very public fight with Jerome Powell about interest rate policy for quite some time. And the Justice Department announced that they were doing a potential

criminal investigation in Chairman Powell around cost overruns at the Federal Reserve building. Chairman Powell believed that was pretextual and a form of warfare and kind of an intimidation tactic. The White House denied that, of course. But one person who thought that did sort of line up was Senator Ton Tillis, who's on the Senate Banking Committee and is a Republican senator in the great state of North Carolina who said he was not going to advance Kevin Warsh's name for confirmation at the Fed until this DOJ matter with Powell was resolved. Many other Republican senators shared the same sentiment, and this was not a pushback on Kevin Warsh. In fact, Senator Tillis explicitly said he supported Kevin Warsh, but the only leverage they had to put an end to what they believed to be

this sort of lawfare component and excessive use of criminal threats and whatnot on the PAL property aspect was to hold back the confirmation. Well, sure enough, this morning, the Attorney General in Washington, D.C., in that region, Janine Piro, formerly a Fox News host, stated that they were dropping the criminal investigation and asking the Inspector General of the Fed to investigate what might have gone on with cost overruns. The Inspector General has investigated it twice and come back and concluded that they didn't see anything nefarious there. And this was a project approved before Chairman Powell came to the... the chairmanship of the Fed back in early 2017, and you may not be shocked to know. Some parts and labor and equipment have gone higher since 2017, which appears to be the bulk of the explanation for why the very complicated project, as like most government projects,

cost way more than originally expected. Be that as it may, I have no interest in defending the renovation. I personally don't think the Fed needs in... Dave land, the size of the Fed wouldn't require that much real estate to begin with. And it certainly wouldn't require excessively exorbitant real estate. But the idea of it all being criminal, you know, the Justice Department said themselves, they didn't find anything criminal. So at this point, we can side with the Trump administration.

They agree with Chairman Powell. There wasn't something criminal. Well, look, it's all, I'm going to leave that behind and say that what it's done is open the door for Tillis and the Senate Banking Committee to move forward with the non-examination. which they expect to do next week and then get into a full Senate vote in advance of May 15th. There was a data point at Cal She in the prediction markets that had yesterday an expectation that Warsh would be appointed in the 30 to 35 percent range and now it's gone up to the 80 to 85 range by May 15th. And it's around 95 percent. It'd be confirmed by June 1. So essentially at this

point, it is a fait accompli. The one political hurdle, stood in the way, seems to have been removed. And that I think is all a good thing, not only because it eliminates some dysfunction and drama, but also, as I've stated, I'm excited for Kevin Warsh to be in that position. Now, where does it leave us? People then say, okay, well, what's it mean for interest rates? And this is a chart we will put up, is the federal funds futures rate expectations. Right now, there's still over a 60% implied probability in the futures market that we're not going to have any rate change by the end of the year. There'll be no additional cuts. For a little while there, there was actually some look, 10 to 20% probability of a hike. That's been priced out.

But at this point, what was about 75% probability yesterday, no rate cuts the rest of the year, is now down to 62%. So Warsh's increase in presuming. confirmation and expedited confirmation today has moved market expectations quite quickly, but it's still the majority view that there wouldn't be any rate cut for the rest of the year. But I want to be clear, 30 to 35 percent possibility, implied probability in the futures market is not nothing. Five, ten, and twenty percent are very close to nothing. 30 to 35 is a reasonable claim on one additional rate cut by the end of the year. Now, it's only a 6% chance of two rate cuts between now and the end of the year, but we'll leave that out.

Here's what I want to say, though. I have spent the bulk of my time doing public commentary on this subject advocating, and I think correctly so, that it is generally a very bad idea to bet against market expectations when it comes to imminent rate decisions from the Fed, that they, since the days of Greenspan, post-94 Greenspan, have used forward guidance as a policy tool where they are far more informed by what the market will do than they are informing the market. But there is a sort of circularity in this, in that the market is telling the Fed what it expects, but the market expectation has largely been informed by the Fed doing a forward guidance using a kind of self-fulfilling prophecy policy

tool. And I think I've been correct that other than a couple very minor and brief outliers, the Fed has generally guided markets to where they intend to go. And markets have been a better indicator than anything you might hear from what somebody says. And the futures market has not been wrong very often. Now, eight months and 12 months are a lot longer period of time to be wrong. You think back to 2022, it started the year. with a one and a half percent expectation for the Fed funds rate by the end of the year, and they ended up going to five and a half percent. But in the process between the two, the Fed was re-updating their guidance over and over. The reason I'm pushing back on my own advice right now,

or at least qualifying it, and I hope, hopefully doing so thoughtfully, is that the forward guidance of one Fed chair who's leaving is hard to transpose. onto a new Fed chair coming in, that there's a kind of ambiguity about expectation. You could say right now the data indicates oils over $90. We see other Fed governors frowning on the idea of additional rate cuts. And that's all fair enough. And that may very well prevail. But I first have to deal with the fact that it's very hard for me to believe, just pragmatically.

It's very hard for me to believe that given the... the president's public posture on this that the new Fed chair is not coming in and cutting rates at least once. And I'm not saying he should and I'm not saying he shouldn't. And I'm not saying that there's a political intimidation. I'm just descriptively saying it would be surprising to me. But when you move from that kind of anecdotal point to the substance of the case, I would say that right now we're talking about what we think Kevin Warsh may or may not do.

where he is not given any press conference, he has not given any official position, he has not sat down with his colleagues and had a meeting, he has not made a case, he has not argued for a position, and I believe that when he does, he will be arguing that supply shock in oil is not inflationary to the extent of it being the Fed's purview. In other words, it's not a monetary inflationary category. and I happen to believe Warsh would be totally correct about that. You then say, well, the overall inflation level, even apart from oil prices, is not at the Fed's target.

Why would they be cutting rates? And Warsh has an opportunity to make an argument that the balance of risks between very questionable labor markets and where they are at the price level with extracurricular influences from tariffs and oil prices, as opposed to actual monetary policy that it may be that the Fed's waiting of priorities. It needs to lean more into the labor market and full employment side of their mandate than the price stability. He may not win that argument. He may not even make the argument.

But that hasn't taken place yet one way or the other. And I would not put it outside the realm of possibility and even probability. But here's the other piece. What I do believe Warsh is going to argue is not only that the rate should come lower and for some of the reasons I've hypothetically put out so far, but that he doesn't want to do this in a Bernanke-Yellen-Powl way of a broader easing a monetary policy, that it would be coupled with a greater focus on the Fed's balance sheet, that they would have policy bandwidth to tighten more there as a result of greater productivity that he expects in the real economy, which by definition puts downward pressure on the real

policy rate, that it affords them a luxury of using QE as a tool to tighten, which then at the other end of the barbell gives them the Fed funds rate to perhaps lower a bit without becoming excessive or accommodative. I don't know that I think this is totally hypothetical. I think it's very probable that this will be the basic construction of Warsh's argument. Will he prevail with his colleagues? We will see. It would be very surprising to me if you do have the chairman voting with the minority on a rate decision. We just simply haven't seen it. It isn't impossible. Ultimately, what I think Warsh is going to argue, regardless of what its impact is in the short-term interest rate for the next six months and even for the next 12 months, is actually less relevant to me

than the notion of a Federal Reserve Chair arguing for a Fed to have a lower visibility and influence and impact in global markets via their own balance sheet. That is contrary to what the philosophy of the Bernanke-Yellen-Pow post-crisis regime has banned. And I think that there is an argument to be made, that it would be a good signal to Congress. It would be a good signal of the Treasury Department. Congress does their excessive spending. Treasury has to raise debt to pay for it. And the Fed has banned very often, in the case, a buyer of that debt, removing them, or at least signaling that they will be removed from,

in the line of buying, I think would be a positive thing. My friend Renee Annanow of Corbu believes that it would help implement more fiscal discipline. And I'm not sure that's true or not. I hope he's right. But it's possible that Congress is so disconnected from the possibility of fiscal discipline that even losing the Fed's assist would not force them to wake up and smell the quantitative easing removal. But my point would be that there are other benefits that are substantial to price discovery, to encouraging foreign capital flows, to having a healthier, more organic, more visible bond market

that I think would be pro-growth and would ultimately put downward pressure on the long end of the curve. It would not put higher yields at play by the Fed being removed if those other peripheral benefits of the price distortion that QE represents were off the table of the Fed's intervention and non-economic activity that distorts rational economic activity evidenced in bond buying and of course the yield curve. To me, this becomes a very positive thing and enables him than to have a different posture with the Fed funds rate and ultimately play into better credibility, better market credibility for our nation's central bank, if Warsh can succeed in implementing this type of thinking and philosophy. I would love to see a more deregulated approach to central banking. I think Secretary

Besson would as well. I would love to lean into our capital markets. I believe Warsh is a markets guy, and I think that is very possibly the best thing we're going to get out of this. Regardless of what he does, or doesn't do in the next three to six months of rates and what people want them to do or not do in the next three to six months of rates, six months of rates. But having someone that does not believe that our biggest need is more academic papers

and more PhDs pontificating while divorced from market realities, from market signals, from market dynamism and understanding of market dynamism. I think Warsh is a markets guy and understands price discovery. and understands what the Fed can do to impede price discovery.

And that, if I'm right, is pro-growth. And he can't create revolution overnight. But some marginal reformation of how we view the central bank and what we expect the central bank to do would be what I'm most hopeful for. And am I optimistic? Yeah, mildly. But again, we're talking about incremental movement here.

we got to a place in this country where we expect far too much from the Fed, and we got to a place where the Fed was far too willing to give the people what they want. I think Warsh, starting with QE in the balance sheet and bond purchases from the Fed, bond holdings from the Fed, can start to move that expectation. And I think that the results will be positive for markets and certainly the overall risk level that we create through Fed interventions in the economy. In the meantime, let's wait and see how the drama plays out. I believe you're going to see Chairman Warsh sooner than later. I look forward to it. And I most certainly am if I get disappointed in what happens and prepared for that because it would not be the first time that I have been

disappointed after some mild and modest levels of optimism and hope and expectation. I do hope you all have a wonderful weekend. I appreciate you listening, reading, and watching the Dividend Cafe. It's always fun to get the Fed back into what we're discussing. And we're going to have a really big Monday dividend cafe. Lots going on, public policy, obviously more Iran updates, market updates, etc. So I'll be back with you in the Divident Cafe on Monday here in our studio headquarters of Newport Beach, California. In the meantime, thanks for listening and have a wonderful weekend.

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