Powell's Last FOMC... 'Wash's Fed' Nears, Securities Industry on Edge

Powell's Last FOMC... Securities Industry on Edge as 'Wash's Fed' Nears

Domestic securities firms: "Likely to observe for a while due to inflation concerns... variability is increasing"

Jerome Powell, Chairman of the U.S. Federal Reserve (Fed), who has served as the helmsman of the global economy for eight years, held what was effectively his last press conference as chairman on the 29th (local time).

At the press conference held immediately after the Federal Open Market Committee (FOMC) decided to freeze the benchmark interest rate at 3.50-3.75% that day, Chairman Powell stated that he would continue to fulfill his duties as a board member even after his term as chairman ends on the 15th of next month.

On the same day, the U.S. Senate Banking Committee approved the nomination of Kevin Warsh as Chairman of the U.S. Federal Reserve (Fed).

U.S. President Donald Trump had been pressuring Chairman Powell for an early resignation for not readily complying with demands for interest rate cuts.

Amidst this, when the U.S. Department of Justice launched an investigation into allegations of excessive spending on the renovation of the Fed building, targeting Chairman Powell, some Republican lawmakers called for it to stop, obstructing his confirmation.

This raised the possibility that Chairman Powell might remain in office for some time even after his term ended, but with the U.S. Department of Justice recently suspending the investigation, a new chairman can now take office as scheduled with the end of Chairman Powell's term.

The domestic securities industry is closely watching what situation will unfold if Warsh, who has been categorized as a 'hawk' aiming for monetary tightening, takes the helm of the Fed.

Some predict that there will be no significant change in the U.S. monetary policy stance for the time being.

While there is a possibility of interest rate cuts as demanded by President Trump, it would be difficult to easily loosen monetary policy given high oil prices and inflationary pressures due to the Iran war.

Heo Sung-woo, a researcher at Hana Securities, said in a report that day, "If Steve Myron, who was a strong dove, steps down and Warsh takes over, the hawkish color of the Fed is expected to deepen further," adding, "The tightening atmosphere will continue until the peak of inflation is confirmed, and there will only be one interest rate cut this year, in September."

Lim Jae-kyun, a researcher at KB Securities, also added, "If Warsh is to implement interest rate cuts, he will likely need to persuade the Fed committee members."

Kim Jin-sung, a researcher at Kiwoom Securities[039490], viewed that "Warsh's Fed will maintain a neutral wait-and-see stance for a considerable period."

However, he explained that the variability of future policy direction has increased because inflation pressure is rising in conjunction with the Middle East war, and employment conditions could worsen due to future economic growth driven by artificial intelligence and corporate investment.

Researcher Kim predicted, "Even immediately after the change of chairman, attention will inevitably be drawn to the first FOMC meeting led by Warsh," and "The key will be not only the new chairman's philosophy but also how future guidance-related expressions will change."

Concerns are also raised that uncertainty will increase during the process of redesigning the monetary policy path after Warsh takes office as chairman, as he has consistently advocated for changing the Fed's method of measuring inflation.

The Fed has primarily referred to Core Personal Consumption Expenditures (Core PCE), which excludes energy and food items, to assess inflationary pressures. However, Warsh advocates for switching to 'Trimmed Mean' Personal Consumption Expenditures, which only excludes items at the extreme ends.

Regarding this, Kim Myung-sil, a researcher at iM Securities, analyzed, "If we look at Trimmed Mean PCE, the inflation rate is quite close to the Fed's target of 2%. If this indicator is adopted under Warsh's system, it would provide a strong 'statistical justification' to end the high-interest rate stance early and shift to interest rate cuts."