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Hello and welcome to Notes in the Week Ahead, a JP Morgan Asset management podcast that provides insights on the markets and the economy to help you stay informed in the week ahead. Hello, this is David Kelly. I'm Chief strategist here at JP Morgan Asset Management. Today's February 2, 2026 on Friday, the President announced Kevin Warsh as his pick for Fed chair. Warsh has a track record of hawkishness from his previous stint as Fed governor. He's also enunciated a broad philosophy that the Fed has moved too far from its original mandate by promoting ESG objectives and in enabling excessive federal spending through quantitative easing. That being said, he has argued more recently that the Fed should cut interest rates more aggressively. His confirmation by the Senate is probable, although it could be delayed, since the head of the Senate Banking Committee has said that he will oppose Walsh's confirmation until the DOJ's inquiry into Chairman Powell is resolved. However, for investors, the more important issue is the economic, fiscal, financial and monetary landscape he will confront assuming he takes office this spring. This configuration provides little support for substantial further Fed easing. Moreover, because of the structure of the Federal Reserve, Walsh would need to convince the majority of his colleagues of the wisdom of multiple near term rate cuts, something which seems improbable in the current environment. Walsh was first appointed as Fed governor by President bush back in 2006, and he served five years in that role. During his tenure, he never dissented on an actual FOMC vote. However, his speeches and interviews at the time marked him as something of a hulk, expressing persistent concerns about inflation despite the deep recession caused by the Great Financial Crisis, as illustrated in an excellent chart by Anna Wong of Bloomberg. He has also consistently warned about the dangers the Fed overreaching in trying to achieve goals beyond its remit. In a 2010 speech, he railed against protectionism and short term fixes, while noting that the Federal Reserve is not a repair shop for broken fiscal, trade or regulatory policies. More recently, in a speech to the G30 group last April, he argued that the Fed had assumed a more expansive role insider matters of economic policy while moving into matters of statecraft and soulcraft too. He claimed that these forays far afield had led to systematic errors in the conduct of monetary policy. Given this backdrop, Wash seems like an unlikely candidate for the President to pick to achieve his oft repeated goals of lower interest rates. However, in an interview last July on Fox Business, Wash. Endorsed both short term lower short term interest rates and a smaller Fed balance sheet, asserting that cutting both could reduce interest rates across the yield curve. Now, while lowering the federal funds rate could exert some downward pressure on long term rates, it is hard to see how reducing the balance sheet would however, regardless of this issue, the argument for any further monetary easing at this stage is challenging. At first, the economic indicators just don't support the case for further easing. Real GDP grew at an above trend 3.8% annualized in the second quarter and 4.4% in the third. Data on fourth quarter GDP won't be released until February, but recent indications suggest that consumer spending, which accounts for 68% of GDP, grew by roughly 3%. Even if overall fourth quarter real GDP growth was a little slower than that, it should reaccelerate in the first half of 2026 as bumper income tax refunds and potentially a so called tariff rebate check show up in consumer accounts. Consumer spending is also being boosted by the wealth effects of a now more than three year old equity bull market. Meanwhile, areas of capital spending continue to grow because of the AI investment spending boom. The job market doesn't argue for further easing either. On Friday, Governor Waller released a statement explaining his rationale for dissenting from last week's FOMC decision not to lower rates. His principal argument was the labor market remains weak, and so it is in terms of net job creation, with the economy adding just 15,000 jobs per month on average since last June, an estimate that will likely be revised even lower and benchmark revisions due next Friday. However, weak job creation doesn't imply a loose labor market if labour supply is also falling. Weekly unemployment claims have trended down recently, while the unemployment rate at 4.4% in December was unchanged from three months earlier. Most importantly, new population projections released by the Census Bureau last week assume net immigration of just 321,000 between July 2025 and June 2026, which we estimate would imply a 20,000 per month decline in the population aged 18 to 64. It's hard to increase employment if the number of potential workers is falling every month, and this is not, as Kevin Warsh himself would probably argue, a problem that monetary policy will solve. And then there is inflation. At his press conference on Wednesday, Jay Powell noted that the Fed estimates core DCPCE deflator inflation of December at 3.0% year over year. If this is correct, it will be the highest reading since last February and could well move up further to 3.5% by June as the extra demand from income tax refunds allows retailers to pass through more of the cost of tariffs to consumers. Inflation should fade in the second half of 2026. However, with unemployment stable and close to the Fed's 4.2% goal, while inflation is rising well above the Fed's 2.0% target, logic suggests that if anything, the Fed should be tightening rather than easing. The new Fed chairman will also have to consider the possibility of further fiscal stimulus from tariff rebate checks, which could boost both growth and inflation. And then there are the financial markets, where bubbly valuations for stocks, precious metals and cryptocurrencies combined with very tight credit spreads suggest that liquidity is, if anything, too abundant. Finally, monetary policy simply isn't tight by historical standards. As we noted last week, in the 50 years before the great financial crisis, the federal averaged 1.84% above core CPI inflation. We estimate that this spread was 0.98% in January, making current policy loose rather than tight relative to history. This is even before considering the stimulus implicit in the almost $6.3 trillion held by the Fed in Treasuries and mortgage backed securities as the legacy of past balance of qe. The case for aggressive easing is a tough one to make, based on economics, fiscal policy, financial market conditions and current monetary policy. However, equally important to determine the pace of future easing is simply the institutional structure of the Federal Reserve. If the Supreme Court rules that the President doesn't have the authority to dismiss Lisa Cook, and if Jerome Powell decides to remain on the board even after relinquishing the post of Fed Chair, then the two votes in favor of further Fed easing at last Wednesday's meeting could still be just two votes in March. To cut rates further, the new Fed chair would have to have seven. He could, of course, try to persuade his colleagues, his predecessors in recent decades, Powell, Yellen, Bernanke, Greenspan and Volcker all wielded greater power than they technically possessed because of their ability to persuade and the respect they commanded among their colleagues. Chairman Warsh, if he is confirmed, could well achieve that stature over time. In the meantime, however, he will be chairman more than chief and will have to convince his colleagues that he is urging a course that is in the long term interests of the economy and not motivated by short term political considerations. If he does so, and inflation and growth both fall to below 2% by the end of 2026, he may well open the door to more meaningful fed easing in 2027. But to achieve this, he will have to both boldly assert his commitment to Fed independence and act to preserve it, necessities that should be of some comfort to investors both in the United States and around the world. Well, that's it for this week. Please tune in again next week. And if you have any questions in the meantime, please reach out to your Morgan representative.