Podcast Summary: Notes on the Week Ahead

Episode: The Federal Reserve – New Leadership, Same Landscape

Host: Dr. David Kelly, Chief Global Strategist, J.P. Morgan Asset Management
Date: February 2, 2026

Overview

In this episode, Dr. David Kelly analyzes the Federal Reserve’s changing leadership following the President's nomination of Kevin Warsh as the next Fed chair. Dr. Kelly discusses Warsh’s background, his monetary philosophy, and the pressing economic, fiscal, financial, and institutional challenges the new chair will face. Kelly critically evaluates the case for further monetary easing and explains why significant rate cuts remain unlikely, regardless of leadership changes.

Key Discussion Points & Insights

1. Introduction of Kevin Warsh as Fed Chair Nominee

• Warsh's Reputation and Philosophy

  • Historically hawkish; critical of the Fed’s expansion from its original mandate, including promoting ESG objectives and enabling excessive federal spending through quantitative easing.
  • Despite hawkish history, recently advocated for more aggressive rate cuts.

• Confirmation Outlook

  • Likelihood of Senate confirmation is “probable, although… could be delayed.” (00:45)
  • Delay could be due to ongoing DOJ inquiry into current Chairman Powell.

“However, for investors, the more important issue is the economic, fiscal, financial and monetary landscape he will confront assuming he takes office this spring.” (01:14)

2. Warsh’s Track Record and Views

• Appointed as Fed governor in 2006; did not dissent on FOMC votes but voiced concerns about inflation and the Fed overreaching beyond its mandate.

• Quote from 2010:

  “The Federal Reserve is not a repair shop for broken fiscal, trade or regulatory policies.” (02:10)

• Warsh’s April G30 speech: Criticized the Fed for drifting into “statecraft and soulcraft,” arguing this led to systemic policy errors.

• Paradox in being selected for monetary easing:

  “Given this backdrop, Wash seems like an unlikely candidate for the President to pick to achieve his oft repeated goals of lower interest rates.” (03:08)

3. Warsh’s Recent Policy Stance

• In a 2025 Fox Business interview, Warsh endorsed both lower short-term rates and a smaller Fed balance sheet.
• Dr. Kelly’s skepticism:

  “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.” (03:41)

4. The Weak Case for Further Easing

Economic Indicators

• Above-trend real GDP growth:

  • Q2: 3.8% annualized; Q3: 4.4%.
  • Q4 consumer spending estimated at ~3% growth.
  • Anticipated boost in early 2026 from income tax refunds and possible tariff rebate checks.

• Job Market

  • Net job creation modest: 15,000/month since June 2025, potentially revised downward.
  • Labor supply declining: Census projections suggest a 20,000/month fall in working-age population.
  • Unemployment rate stable at 4.4%.

“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.” (06:06)

Inflation

• Fed estimates December core PCE inflation at 3.0%, the highest since last February; may rise to 3.5% by June.
• Driven by extra demand from tax rebates and pass-through of tariff costs.
• Inflation expected to fade in the second half of 2026.

“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.” (07:09)

Fiscal and Financial Conditions

• Additional fiscal stimulus (tariff rebate checks) could further stoke growth and inflation.
• Financial markets: “bubbly” valuations in stocks, precious metals, cryptocurrencies; tight credit spreads indicate “too abundant” liquidity.
• Federal funds rate is not historically tight: average spread relative to core inflation is below long-run norms.

“We estimate that this spread was 0.98% in January, making current policy loose rather than tight relative to history.” (08:33)
“…the almost $6.3 trillion held by the Fed in Treasuries and mortgage backed securities as the legacy of past balance of QE.” (08:47)

5. The Institutional Structure of the Fed

• The process of lowering rates requires convincing the majority of the FOMC—mere leadership isn’t sufficient.
• Legal/institutional uncertainties: Supreme Court case about Fed governor dismissals and the status of Jerome Powell.
• Importance of chair’s persuasive influence, citing predecessors (Powell, Yellen, Bernanke, Greenspan, Volcker).

“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.” (09:51)

6. Outlook for Investors

• If inflation and growth subside below 2% by end-2026, further easing in 2027 may be plausible.
• Warsh must assert and preserve Fed independence—a point Dr. Kelly frames as reassuring to investors.

“…necessities that should be of some comfort to investors both in the United States and around the world.” (10:18)

Notable Quotes & Memorable Moments

• On the limits of monetary policy:

  “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.” (06:06)

• On the stance of monetary policy:

  “We estimate that this spread was 0.98% in January, making current policy loose rather than tight relative to history.” (08:33)

• On the Fed chair’s real power:

  “…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.” (09:51)

Timestamps for Important Segments

• 00:45 – Kevin Warsh nominated as Fed Chair and confirmation politics
• 02:10 – Warsh’s criticisms of the Fed’s expanding role
• 03:08 – The paradox of Warsh’s selection for rate cuts
• 06:06 – Labor market challenges and demographic headwinds
• 07:09 – Analysis of inflation trends and Fed mandate
• 08:33 – Assessment of monetary policy stance
• 09:51 – Fed chair's influence and the need for consensus
• 10:18 – Reassurance for investors regarding Fed independence

Final Takeaways

Dr. Kelly concludes that while a new leader at the Federal Reserve may grab headlines, the landscape Warsh will face offers little justification for substantial monetary easing. Structural economic conditions, inflationary pressures, and the Fed’s consensus-driven institution limit what any chair can do in the short term. Warsh’s priority, if confirmed, will need to be on restoring and preserving Fed independence—an ultimately reassuring signal for investors.