New Beginnings, Enduring Open Questions

Kevin Warsh officially became the 17^th Federal Reserve Chairman today following a White House ceremony, and markets are focused on how policy changes may unfold. For context, to fulfill its Congressional mandates of fostering full employment, price stability and moderate long-term interest rates, the Fed uses several tools — but interest rate policy remains its most familiar. Capital markets came into this year anticipating a few rate cuts designed to stimulate a sluggish labor market. The Iranian conflict stoked already pervasive inflation, shifting interest rate expectations to hikes versus eases. As of today, the Federal Reserve’s effective interest rate target is expected to increase a scant 0.2% by September of 2027.¹

The Fed’s immediate agenda is to reconcile the current inflationary environment with economic fundamentals obfuscated by the Iranian conflict. We have shared our view that the longer the peace process takes, the greater the risk that consumers and businesses pare back on spending. While we are not yet seeing spending pullbacks through the current earnings season, we are paying attention to a few variables we will discuss later. That said, a tepid labor market coupled with sticky inflation leaves the Fed in a difficult position.   

Based on voting history, the latest Fed meeting represented the most divided votership since 1992, and division existed within the division; one voting member wanted a rate cut, and three members argued to change the Fed’s stated “bias” for lower interest rates to higher. Further, longer-term interest rates, which central banks like the Fed do not directly control, have been migrating higher in yield due to concerns about inflation and sovereign indebtedness, leaving investors concerned about consumer borrowing costs like mortgage and credit card rates. Markets will look to the next Fed meeting, a mere three and a half weeks away, for signals that may impact how bond investors view near- and long-term rates.

Longer term, what we are most focused on are changes to the Fed’s toolkit, how the Fed measures inflation, and their communication policies. Through assessing testimony and press accounts, Warsh has been opposed to the Federal Reserve using its balance sheet as a policy tool, preferring traditional interest rate targeting. Warsh also prefers different inflation measures from more traditional Fed benchmarks, including trimmed mean measurements, which remove outlier data points across a broader consumption basket.² Finally, markets have grown accustomed to communication frequency and depth under the Powell chairmanship, with press conferences after every meeting and a Summary of Economic Projections released every other meeting detailing voting members’ forward views.

Markets can adjust to change, but how incremental Warsh chooses to be will be foundational. Although the Fed’s balance sheet has shrunk from just under $9 trillion in April 2022 to its current $6.7 trillion, the Fed’s presence in government bond and mortgage bond markets remains significant.³ As we have detailed in these pages, for the past four years, the Fed has ratcheted up its expectations for its base interest rate target by a full percentage point from 2.25% to 3.25%, so markets will watch changes to those communicated expectations.⁴ Finally, while a qualitative consideration, markets have become accustomed to increased Fed transparency, so alterations may be unwelcome by investors.

Fundamentally, Federal Reserve independence is a key construct underpinning how markets digest Warsh and his appointment by President Trump. While likely a better soundbite than portend, this is the first time in 40 years that a Fed Chair was sworn in while physically at the White House and not the Federal Reserve building. That said, we note that then-Federal Reserve Governor Kevin Warsh made a speech on March 26, 2010 entitled “An Ode to Independence,” where he stated that “there is no such thing as being a little bit independent or a little bit credible.”⁵ Financial markets, agnostic of politics, will determine this statement’s veracity with a new Fed dynamic.

Probably the world’s most scrutinized earnings report, Nvidia is the foremost leader in global AI computing. Nvidia provides chips, networking, services and infrastructure to what is termed the broad AI ecosystem. From their earnings report, Nvidia shared that data center buildouts continue to grow, with Nvidia seeing a 92% growth rate. As AI companies continue to develop tools to enhance customer experiences, they continue to rely on Nvidia technology. Nvidia’s customer revenues continue to be dominated by “hyperscalers” with large budgets geared toward enhancing AI models. CEO Jensen Huang highlighted that “we’ve now arrived at the era of useful AI, which is the reason why demand is going parabolic, utterly parabolic… It’s a big deal in productivity, but a gigantic leap in computation requirements.”¹⁰

Our overall view on AI remains that the technology has more room to grow and diffuse across industries, businesses and consumers. As we have heard from several companies this past quarter, demand continues to exceed supply across various facets within the ecosystem. However, trees don’t grow to the sky, and eventually the diffusion will slow, or the price that customers are willing to pay (or the amount shareholders allow them to spend) will level and eventually fall. The risk is an overbuild where supply exceeds demand. Uber’s chief technology officer reportedly revealed that they have already exceeded their budget for the year based on one of their vendor’s pricing model.¹¹ Investors and companies alike will need to gauge the benefits of ongoing spend, and while we believe AI remains a transformative technology, the supply/demand balance will remain a focus for us.

Our working hypothesis on the Iran conflict was that it would not severely impact corporate profits or credit, and thus we retained our glass-half-full forward outlook for diversified portfolios. We did anticipate some uneven impacts by region given divergent dependencies on hydrocarbons like oil and natural gas. Given divergent regional fundamentals heading into the conflict, including a strong Japanese growth impulse juxtaposed by a lethargic European backdrop, how regions like the UK and continental Europe endure the current conflict remain open questions.

While an imperfect measure based on challenges inherent in survey data, this week we received a global temperature check on Purchasing Manager Indices (PMIs) from Standard & Poor’s. This gives us a sense of how companies are feeling about the current and future business climate. A few items stand out. European respondents cited “intensification of cost pressures” amid declines in business output, new orders and employment.¹² Australia’s private sector saw the steepest drop in new business in over four and a half years, led by the service sector.¹³ Japan saw an increase in manufacturing activity, although some concerns exist around stockpiling to combat supply chain imbalances attributed to the Iranian conflict.¹⁴ India was a bright spot, with both services and manufacturing growth expanding. The United States continued its durability, with manufacturing strength but tepid service sector performance. In their analysis, S&P emphasized that input costs rose in May at the steepest level since late 2022, and they also cited concerns on stockpiling driving strength.

Our read on the survey data is consistent with earnings reports highlights: businesses and consumers have been resilient, yet fatigue is emerging within specific regions. Should the conflict’s tenuous détente end and tensions rise, central banks increase interest rates and labor markets soften (again, not all central banks have mandates targeting employment), this weakness could extend. We still see a positive path forward, but we remain focused on marginal change.

¹ Northern Trust Wealth Management Research- market implied interest rates extrapolated from Bloomberg, accessed on terminal 22 May 2026.

² What are trimmed mean and median inflation rates? And why does Kevin Warsh prefer them?. Brookings. Accessed 22 May 2026.

³ Credit and Liquidity Programs and the Balance Sheet. Board of Governors of the Federal Reserve System. Accessed 22 May 2026.

⁴ Northern Trust Wealth Management Research- Federal Reserve median dot plot Summary of Economic Projections accessed from Bloomberg, 22 May 2026. 

⁵ An Ode to Independence. Board of Governors of the Federal Reserve System. Accessed 22 May 2026.

⁶ Walmart Releases Q1 FY27 Earnings. Accessed 22 May 2026.

⁷ Target Corporation Reports First Quarter Earnings. Accessed 22 May 2026.

⁸ The Home Depot Announces First Quarter Fiscal 2026 Results; Reaffirms Fiscal 2026 Guidance. Accessed 22 May 2026.

⁹ Lowe's Reports First Quarter 2026 Sales and Earnings Results. Accessed 22 May 2026.

¹⁰ NVIDIA CEO Jensen Huang at Dell Technologies World: 'Demand Is Going Parabolic, Utterly Parabolic'. NVIDIA Company Blog. Accessed 22 May 2026.

¹¹ Uber CTO Shows Claude Code Can Blow AI Budgets. The Information. Accessed 22 May 2026.

¹² S&P Global Flash Eurozone PMI®. S&P Global News Release. Accessed 22 May 2026.

¹³ S&P Global Flash Australia PMI®. S&P Global News Release. Accessed 22 May 2026.

¹⁴ S&P Global Flash Japan PMI®. S&P Global News Release. Accessed 22 May 2026.