With the Fed's Transition Near, the US Economy Risks Entering a "Resistance" Phase
US inflation remains subdued, while the Federal Reserve's chairmanship is approaching—a combination that makes markets more sensitive to every inflation data and policy signal. The latest projections for February's CPI still place headline inflation around 2.4% and core inflation around 2.5%, while markets also face renewed volatility from the spike in energy prices related to the Iran war.
On the leadership front, the White House has submitted Kevin Warsh's nomination to the Senate to replace Jerome Powell when Powell's term as chairman ends on May 15, 2026. The confirmation process is expected to be uneventful, adding another layer of uncertainty about the Fed's communication style and policy priorities after the transition.
For the US economy, the most likely scenario in the short term is that interest rates remain tight for longer until there is clear evidence that inflation has returned to a consistent decline. If energy and tariffs again add to price pressures, the room for easing could narrow even if growth remains resilient. Reuters previously noted that the Fed's favorite inflation measure, core PCE, had shown signs of warming, making the market more susceptible to being "surprised" by subsequent inflation data.
The impact on the market typically occurs through three channels. First, Treasury yields: sticky inflation tends to keep yields high as markets delay expectations of a cut. Second, the dollar: the USD typically finds support when yields are high and uncertainty increases. Third, risk assets: prolonged high interest rates can depress equity valuations and increase funding costs, although this does not automatically mean a recession.
Market participants will be monitoring the consistency of inflation data (CPI and especially PCE), whether energy prices are starting to spill over into core/services inflation, and the progress of the new Fed Chair's confirmation process, which will influence perceptions of independence and the direction of policy communication.
What's most likely to happen?
1) Interest rates are likely to remain high for longer. If inflation hasn't fallen convincingly, the Fed typically chooses to "hold on" rather than quickly ease. The market is also currently sensitive because the Iran war has caused volatility in energy prices, which could push up headline inflation again.
2) The "two-speed" risk is becoming more apparent: the economy is still running, but it's getting more expensive.
The latest inflation data before the war showed inflation still falling slowly (for example, core CPI was around 2.5% y/y in January). But if energy and tariffs contribute to price increases, the cost of living and capital costs could remain high, slowing growth without an outright recession.
3) Market volatility could increase ahead of the Fed chairman transition
A change in Fed chairman makes the market "guess" the Fed's future policy style: how hawkish/dovish it will be, how strong its commitment to independence will be, and how the Fed's communication will change. Brookings notes that this transition is indeed a point of great interest, especially when there are political issues surrounding the Fed.
4) The dollar and yields will remain key barometers
If inflation/energy prices push "higher for longer," yields tend to remain high and the USD relatively strong.
If inflation truly cools and the Fed can ease further, yields could fall and the USD weaken.
5) Risk to the global economy: tightening financial conditions
High US interest rates for longer typically put pressure on global financial conditions (USD funding costs, capital flows, emerging FX). This doesn't automatically mean a crisis, but it does create more global "breathing room."
What market players should monitor (most relevant):
CPI and PCE (whether energy inflation is spilling over into core/services inflation).
Oil and gasoline prices (because the Iran war makes energy flows key to inflation).
Fed communications leading up to May 2026 + the confirmation process for the new chairman (policy tone, independence).
Treasury yields (2Y/10Y) as "pricing" for market interest rates. (Cp) Source: Newsmaker.id
