Summary:

• Market pricing of one quarter point rate hike is completely right but utterly nonsensical all at the same. A simple Taylor rule is consistent with a hike. Risk-wise, Warsh is more likely to be a closeted hawk than a dove – hence the lukewarm pricing of one hike. But when was the last time the Fed did a ‘one-and-done’ (decades ago). And what good is a single lousy hike when inflation is tracking north of three percent and has been above target for four years straight?

• A dovish coup at the Fed is hard to pull off. The Board of Governors is hostile. And with Stephan Miran having given up his seat for Warsh himself, there are no outright doves on the Board. The roster of regional Fed Presidents with a vote on the FOMC leans decidedly hawkish;

• Expecting a hawkish Warsh – one who is serious about getting inflation finally under control – is assuming that President Trump acted out of character when picking Warsh. Trump 2.0 has nominated loyalists above all other qualifications. Warsh would be going against the grain. Unlikely, but still a bigger risk than being a dove/Trump stooge;

• All in all, I expect Warsh will make much noise about operational changes at the central bank. But that’s window-dressing. I am not expecting a firm commitment – and action – to bring inflation down finally.

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