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MIGHT TRUMP PREFER POWELL TO WARSH?

Of the (likely) two Fed chairs of his second term could U.S. President Donald Trump actually end up liking Jerome Powell more than his new pick Kevin Warsh?

That idea would have seemed somewhat far-fetched a few months ago, when Trump was castigating Powell for not cutting interest rates more quickly and the Department of Justice launched a criminal investigation into Powell regarding cost overruns in renovations at the central bank's headquarters.

But hear us out.

U.S. CPI was 3.8% year on year in May and is trending higher.

Mark Dowding, CIO for Fixed Income at RBC BlueBay Asset Management says with the situation in the Middle East remaining at an impasse, they currently see CPI peaking at around 4.5% over the summer, with the lack of an early resolution representing a further upside risk.

"From this perspective," Dowding writes in a Friday note, "although we can be confident that the FOMC won't be hiking rates in June, should CPI print with a 5% handle and remain there for a few months, then we would expect the Fed to hike in September."

"Although this is not our base case, and it is our belief that Warsh will want to look through the elevated price data in the short term, the risk of a hike will only continue to build, for as long as we remain on this current trajectory."

Markets agree and are pricing around an 80% chance of a rate hike by year-end.

And Dowding reckons "market participants may come to appreciate that Jay Powell was a relatively dovish Fed Chair, and that Kevin Warsh may yet end up being somewhat more hawkish by comparison."

And if that's the case, what will Donald Trump say?

(Alun John)

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