Jerome Powell broke a 77-year precedent by staying on as a Fed governor after his chairmanship term expired. He moved to an office a few doors down from new chair Kevin Warsh. Powell’s leverage was blocking a second Trump nominee to the seven-member board, following a spurious Justice Department investigation into Fed HQ renovations that was dropped only after a Republican senator retaliated.
"Powell argued he stayed because threats risked politicizing the Fed's monetary policy."
- The Daily
By holding his seat, Powell turned the Fed’s succession into a Supreme Court-style drama. Officials now game their retirement dates based on who sits in the Oval Office. Powell’s presence keeps the board at full capacity and limits Warsh’s power from day one.
Warsh built his reputation as an inflation hawk, criticizing the Fed’s balance sheet expansion from under $1 trillion pre-2008 to nearly $9 trillion post-pandemic. To secure Trump’s nomination, he softened his stance on rates. His first test comes in June: economic data suggests holding rates steady to fight lingering inflation, but the president demands cuts. If Warsh cuts, he loses the Fed staff’s respect; if he holds, he faces the Twitter-fueled rage that ended Powell’s chairmanship.
Meanwhile, massive AI capital expenditure is propping up the entire economy. Neil Dutta on Forward Guidance notes this is the largest capex boom in decades, surpassing the late 1990s. AI spending fuels corporate earnings, which drive stock prices, which then juice consumer spending via a wealth effect.
"This loop masks underlying weakness. Real disposable income growth is anemic, yet consumption remains steady because households treat their equity gains as income substitution."
- Neil Dutta, Forward Guidance
Felix Jauvin adds that on a real basis, retail spending has flipped negative. A $47 billion tax refund buffer against high energy prices is hitting its limit, with 90-day credit card delinquencies reaching cycle highs. The bottom half of the K-shaped economy has run out of runway.
The Fed’s policy tilt is shifting hawkish because there’s no trade-off: the labor market is stable, inflation remains above target, and equity markets are at highs. Dutta expects the Fed to soon remove its ‘additional adjustments’ easing bias language from statements. For the Fed to cut, something in the economy must actually break.
Democratic unity on crypto cracked. The Senate Banking Committee advanced the Digital Asset Market Clarity Act in a 15-9 vote, with Democrats Ruben Gallego and Angela Alsobrooks joining all 13 Republicans. Elizabeth Warren led the opposition, claiming the bill “declares open season” on defrauding consumers, but her amendments targeting crypto mixers were blocked.
Bitcoin’s brief climb to $82,000 after the news was crushed by macro gravity. 10-year Treasury yields hit 4.52%, their highest in ten months, as sticky CPI data showed 3.8% year-over-year inflation. The carnage wasn’t isolated: silver dropped nearly 10%, and Japanese 10-year yields reached multi-year highs. Institutional investors used the yield surge to take profits from spot ETFs.
The question is how far the dominos fall. Powell’s boardroom standoff ensures the Fed’s independence faces its most direct political test yet, while the AI-fueled wealth effect papering over consumer stress depends on hyperscalers continuing their debt-funded spending spree.
