Daily Commentary

MarketMinder’s View: This article covers the Senate’s nomination hearing for Fed Chair Nominee Kevin Warsh, so you know it touches on politics. Please keep in mind as you peruse it that we favor no party nor any politician, assessing developments solely for their potential market and/or economic effects. This hearing and statements from it will get a lot of scrutiny in the coming days, especially in light of President Donald Trump’s spat with existing Fed head Jerome Powell, which many cast as a threat to its ability to set monetary policy free of partisan politics. Warsh’s comments here are interesting on a couple of fronts. One, he reiterated a view that the Fed should be free to set policy without influence from the White House or any politician. But he also said this doesn’t extend to non-monetary policy matters (likely a move designed to give oxygen to the Department of Justice’s investigation into the renovation of the Fed’s offices). And, most interestingly, “Warsh’s speech also features a familiar criticism he has brought in recent years, namely that the Fed on multiple occasions has overstepped its boundaries and reached into areas such as climate change and social inequality. ‘The Fed must stay in its lane. Fed independence is placed at greatest risk when it strays into fiscal and social policies where it has neither authority nor expertise.’” This is a sensible point. The Fed’s independence is intended over monetary matters only, which affect the broad economy via its influence on credit. It has no demonstrated ability to influence matters at the more microeconomic level, like wealth inequality. It seems sensible to us that Fed officials stay out of politicized matters if they wish to retain apolitical standing. But will this stance remain if and when Warsh becomes the next Fed head? We really have no idea, as Fed officials often say one thing in hearings, only to forget everything they knew when in office.

MarketMinder’s View: This is a minor matter from a broad economic viewpoint and one with little to no market impact, but the direction of travel on trade matters here is noteworthy. Britain and the EU are closing in on another agreement mitigating divergences caused by Brexit, this time in the regulation of things like seafood and other agricultural exports. “Labour’s plan to reduce trade barriers for food exporters would mean applying all future EU rules and regulations in relation to farm produce under what is known as ‘dynamic alignment’. Under negotiation is an agreement to accept the 76 laws that have either been passed in Brussels or from which the UK has already diverged in the farm food area. On Tuesday, peers were told that the UK could have pursued an alternative path such as the ‘mutual recognition’ of food standards that supports trade between New Zealand and the UK.” As this piece documents, a deal reducing divergence here could be a boon for some exporters in the UK and EU, but the gains are small. The bigger idea here is that this is another example of trade barriers falling outside the US, one of several key reasons why last year’s US tariffs haven’t had the huge negative impact many expected. Rather than kick off a trade war, it seemingly encouraged more non-US trade cooperation. That is a positive surprise.

MarketMinder’s View: Another day, more news documenting the fact that Iran’s closure of the Strait of Hormuz is likely to permanently reduce its importance in time. Simply put, people respond to incentives and the oil-producing nations around the Persian Gulf have seen the importance of having alternatives like the Saudia Arabian East-West Pipeline that avoids the blockaded bottleneck. They aren’t likely to miss the lesson here, and there is more and more talk of expanding pipeline networks and finding other workarounds for shipping oil and other goods out of the Strait. For all the skeptical talk about politics getting in the way, we think the financial and economic motivations here will overwhelm in time. This isn’t a fix in the here and now—it will take years. But, “‘The Strait of Hormuz will be less important in 2030 or 2035 than it was in January,’ said Elliott Abrams, who served as a special representative for Iran and Venezuela during the first Trump administration. ‘People will find alternatives.’”