February 6, 2026

Market participants had plenty to think about this past week.  President Trump named Kevin Warsh as the next Fed Chair.  Who is this guy and to what extent will he be pushing hard for the significant drop in rates that Trump wants to see?  The weather was miserable in January as record cold weather and a series of snow and ice storms likely reduced economic activity significantly in that month.  But is the softness in January all weather-related, or could some of it reflect the long-awaited economic slowdown?  The buildup of U.S. forces around Iran continues as Trump appears headed for some sort of military action.  What will that look like?  How will Iran respond?  Do Israel, China, and Russia get involved?  What does that imply for oil prices?  The labor market softened in November and December as job openings sank.  What does that portend for the jobs picture in January and the months beyond?  Is this the beginning of significant job losses caused by AI?  Given all these potential worries the stock market was extremely volatile during the week, but ended the week only about 1.0% below its record high level.  Thus far investors have largely shrugged off these concerns.  Are they right?

We think Kevin Warsh will be a good Fed Chair.  He was a member of  the Board of Governors of the Fed from 2006-2011.  He knows how the system works.  He knows that he needs to build a consensus between the Fed governors in Washington D.C. and Reserve Bank presidents throughout the country to make monetary policy work effectively.  His view of lower rates is built on a recognition that technology, AI in particular, is going to significantly boost productivity growth, raise the economy’s potential growth rate for years to come, lower inflation, and eventually pave the way for lower rates.  We subscribe to that line of thought, but the exact numbers for all of those factors have yet to be determined.

Warsh also knows the problems within the Fed and he has recently been a vocal critic.  For years the Fed had a single target – a 2.0% inflation rate.  Is that the right number to target?  The Fed now has a dual mandate — keep the inflation rate at 2.0% and, simultaneously, achieve full employment.  The Fed thinks that occurs when  the unemployment rate is 4.2%.  When those two targets get out of sync and point in different directions  —  as is the case currently – it allows for politics to enter the equation.  Fed officials have to decide which goal is more important and it is unlikely that they will all agree.

Then there is the Fed’s mission creep.  In recent years it got involved in climate change for a while and tried to force large banks to manage climate-related financial risks.  But its mandate does not include climate policy and it has since gotten out of that business.  In addition to targeting full employment, it now prioritizes “inclusive” maximum employment which means that it is trying to reduce racial disparities in unemployment rates rather than just looking at the national average which can mask high employment rates for blacks and other minorities.  But how in the world can it do that?  The Fed simply does not have the tools to impact climate policy or differing unemployment rates amongst various minority groups even if it wanted to.  Get back to the basics and only target inflation.

The weather was atrocious in January with record low temperatures in many areas of the country with snow and ice everywhere.  The weather should sharply curtail many economic indicators such as retail sales, housing starts, and home sales.  The press will undoubtedly jump on those indicators as being indicative of slower GDP growth with job losses ahead.  We believe that most of the weakness in January was caused by the weather.  But some of that softness could be indicative of a legitimate slowdown in economic activity.  Only time will tell.

Military action in Iran seems inevitable but beyond that it becomes a guessing game.  How will Iran respond?  With a face-saving token response?  Or aggressive action which could target U.S. bases in the region?  Will it launch a missile attack on Israel?  Iran matters to Russia because it presumably provides  Russia with drones as well as oil.  It supplies China with oil.  How will those two countries respond?  Where will oil prices settle?  Around their current level of $64 per barrel?  Or $80?  All of these things matter, but at this point nobody can accurately predict the outcome.

The weakness in job openings in  November and December could signal weakness caused by AI-related layoffs.  But lots of workers retire at yearend and others could by laid off from their current job at yearend.  This needs to be watched carefully.

The point is that there are a lot of balls in the air at the moment.  Do not be too quick to conclude that the economy is about to go down the tube.  The weather will eventually improve.  And Trump’s bargaining  tactics always seem to threaten terrible things about to happen, but shortly thereafter he softens the blow and the eventual outcome is not so troublesome.  We also believe that AI will eventually create as many or more jobs than are lost.  AI has been in the picture for more than a year and the unemployment rate remains at 4.4% which is only slightly higher than desired.  At the same time the economy has been chugging along with 4.0% growth for the past three quarters.  Thus far AI has triggered some job dislocations, but its impact on the overall economy and the labor market has been relatively small.

Hang in there.  Let’s see what happens next.

Stephen Slifer

NumberNomics

Charleston, S.C.