Why Trump’s pick for Fed chair will not bring home the bank for the president

The article argues that even if Kevin Warsh replaces Jerome Powell, Trump is unlikely to gain control of the Fed or force lower rates. It says AI-driven productivity gains are not yet visible in the data, while tariffs, deportations, and a budget deficit near 6% of GDP are keeping inflationary pressure elevated; last month inflation rose above 3% versus below 2% in the late 1990s. The piece suggests the Fed could still be forced to keep rates higher for longer, with only a long-shot path to a Trump-aligned majority on the FOMC.

Analysis

The market takeaway is not “rates are going lower,” but that the front end is vulnerable to a policy credibility premium. If the Fed is perceived as politically pressured while inflation remains sticky, the curve can steepen for the wrong reason: not easier policy, but higher term premium and a more volatile path for real rates. That is a headwind for duration-heavy assets and a tailwind for financials with deposit franchises, provided credit does not crack.

The bigger second-order effect is that AI may be inflationary before it is disinflationary. Near term, capex into data centers, power, cooling, memory, and networking is an input-cost shock masquerading as productivity spending, which supports equipment makers and utilities but can keep core goods and electricity pricing elevated for 2-4 quarters. The consensus is overconfident in the “AI lowers rates” narrative; the more immediate market impact is demand pull-forward, not broad labor-market slack.

Political interference risk also matters more for policy volatility than for the average level of rates. Even if the next chair is dovish, the committee structure and legal constraints make a full control outcome unlikely, so the tradable risk is repeated disappointment: brief rallies on dovish headlines, then reversals as the market prices a slower easing path and a less credible Fed. That setup favors relative-value trades over outright directional duration bets.

Contrarian view: the market may be underpricing how quickly AI capex can turn from a demand booster into a margin problem for downstream sectors. If power and memory costs keep rising while productivity benefits remain diffuse, earnings revisions should bifurcate sharply between infrastructure beneficiaries and consumer-facing firms unable to pass through costs. In that world, the correct trade is not to buy lower rates, but to own the plumbing of the AI buildout and fade sectors that depend on cheap capital and stable input prices.

Key Decisions for Investors

• Short TLT / long XLF for 1-3 months: if Fed credibility erodes, the curve can steepen while banks benefit from less duration sensitivity and relatively resilient net interest income; risk is a clean disinflation print that re-anchors rate-cut expectations.
• Long a basket of AI infrastructure enablers (NVDA, ARM, ANET, VRT) on pullbacks over the next 2-6 weeks: AI capex is the real near-term demand story, with upside from continued data-center spend even if broad AI productivity is delayed.
• Pair long utilities with strong data-center exposure (NEE, CEG, VST) versus short energy-intensive industrials (FCX, DD, DOW) over 3-6 months: electricity and cooling demand should support regulated/power assets while input-cost pressure hits cyclicals.
• Buy receiver swaptions or TLT call spreads for event-driven hedging into Fed leadership headlines: convexity is attractive if markets overreact to dovish appointments, but keep sizing modest because committee constraints limit the downside in yields.
• Avoid outright longs in high-duration small caps until the next two inflation prints: if policy remains politicized, real-rate volatility can stay elevated and punish unprofitable growth more than large-cap AI leaders.