Jerome Powell is moving his office a few doors down the hall. His term as Chair ended, but he refuses to relinquish his seat as a Federal Reserve governor, a break from tradition last seen in 1947. Powell stated he stayed because political threats - including a spurious Justice Department probe into renovation costs - risk politicizing monetary policy. By remaining, he keeps the board full and prevents the president from appointing another ally.
“Powell’s continued presence politicizes Fed succession, mirroring Supreme Court dynamics.”
- Colby Smith, The Daily
The central bank’s independence is now a boardroom standoff. Powell’s successor, Kevin Warsh, built his career as an inflation hawk who criticized the Fed’s post-2008 balance sheet expansion from under $1 trillion to nearly $9 trillion. He argued it exacerbated inequality. To secure the nomination, Warsh softened his stance on rates, aligning with political demands for cuts. His first test comes in June, with inflation risks from war and oil prices making cuts economically dangerous.
Neil Dutta argues the Fed is abandoning its easing bias anyway. With unemployment low, inflation above target, and equities at records, the central bank has “zero incentive to ease.” He expects the ‘additional adjustments’ language - historically code for cuts - to be removed by summer. The threshold for a policy shift has risen: something in the economy must break.
“The Fed’s hawkish tilt is the only logical direction with sticky inflation and buoyant financial conditions.”
- Neil Dutta, Forward Guidance
What’s propping up those financial conditions is a specific kind of break. This is the largest capex boom in decades, surpassing the 1990s, but it’s a financial accelerator. AI spending fuels corporate earnings, which drive stock prices, which then juice consumer spending via a wealth effect. Dutta warns this loop masks underlying weakness; real disposable income growth is anemic. Households treat equity gains as income substitution.
Felix Jauvin argues the American consumer is “smoked.” On a real basis, retail spending has flipped negative. $47 billion in tax refunds acted as a temporary shock absorber against high energy prices, but that buffer is gone. 90-day credit card delinquencies have hit cycle highs. Jack contends the bottom leg of the K-shaped economy has been in a recession since late 2023, exacerbated by negative real wages from the recent inflation spike.
“The bottom half of the K-shaped economy has run out of runway.”
- Felix Jauvin, Forward Guidance
Warsh now aims to justify cuts using a ‘Golden Age’ productivity thesis driven by AI. Dutta thinks the data doesn’t support it. In the 1990s, software and chip prices deflated rapidly. Today, the price of compute, memory, and software is rising. A true productivity boom raises living standards, but current real income growth is flat or negative. Without the deflationary tailwinds, Warsh’s argument is a forecast, not a reality.
The policy collision is immediate. Producer Price Index data hit 1.7%, nearly triple the 0.5% economists projected, sending Bitcoin tumbling. David Bennett notes the inherent tension: Warsh views Bitcoin as a ‘policeman’ signaling monetary credibility, but he’s also a confirmed inflation hawk facing runaway producer costs. Bennett argues Bitcoin’s increasing correlation with legacy macro data means ‘finance bros’ are now driving the bus.
Warsh promised a regime change, but the math hasn’.n The entire structure relies on the continuation of a single investment flow: hyperscaler spending on AI. If it cools, the equity appreciation that anchors consumer confidence evaporates. The Fed is now hostage to a tech boom masking a consumer collapse.
