Notes on the Week Ahead

Last week saw dramatic moves in financial markets. Gold and silver, which rose very sharply last year and in January, suddenly lurched down before stabilizing. Bitcoin took a nosedive before achieving a significant, although partial, recovery on Friday. Mega-cap tech stocks posted huge earnings gains but announced even more lofty capital spending plans, contributing to a general selloff in the sector. And, at the end of the week, stocks saw a resounding rally, pushing the venerable Dow Jones Industrial Average over 50,000 for the first time ever.

On Friday, the President announced Kevin Warsh as his pick for Fed Chair. Warsh has a track record of hawkishness from his previous stint as Fed governor. He has also annunciated a broad philosophy that the Fed has moved too far from its original mandate by promoting ESG objectives and in enabling excessive federal spending through quantitative easing. That being said, he has argued more recently that the Fed should cut interest rates more aggressively.

Amidst a torrent of unsettling international and domestic events, the week ahead could be very consequential for the Federal Reserve. The FOMC will hold its first meeting of the year on Tuesday and Wednesday.  While they will likely leave interest rates on hold, any dissents on that decision and their commentary on the economic outlook will provide clues to the direction of short-term interest rates in 2026 and beyond. In addition, this week the President is expected to announce his nominee for Fed Chair, the person who, presuming they are confirmed by the Senate, will lead the Fed over at least the next four years.

Americans don’t like fruit cake.

This issue comes up every December when Sari, having stolen the job from me, sets about making the family Christmas cake. It is a divine confection - currants, sultanas, cherries, candied peel and almonds, liberally presoaked in whiskey and then folded in with flour, eggs, butter and spices and baked for hours at a low temperature. The scent in the kitchen is intoxicating but temporary as the cake, when cooled, is encased first in almond icing and then in royal icing. It weighs in at a hefty eight pounds and tastes magnificent when I can no longer restrain myself on Christmas Eve or Christmas Morning.

Forecasting the economy right now feels a bit like trying to carve a path through thick jungle undergrowth on a foggy day. There are multiple layers of confusion and a forecast has to address these issues first before tracing out a possible path forward.