Fed’s Dovish Pivot Fades: Taiwan Deal, Labor Woes Shake Policy Outlook

Recent weeks have seen rapid developments across three interconnected arenas: the race for Fed Chair, signals from senior Fed officials on monetary policy, and a landmark trade-and-investment deal with Taiwan. Together, they reflect evolving market expectations and policy risk amid geopolitical tension and economic uncertainty.

Fed Chair Race: Warsh’s Ascent and Implications

Once viewed as one of several contenders, former Fed Governor Kevin Warsh has surged ahead of NEC Director Kevin Hassett in prediction market odds following President Trump’s remarks that he would prefer to keep Hassett in his current post rather than muse of appointing him Fed Chair. Hassett’s position, previously favored for being seen as more “market-friendly” and dovish, has weakened in response.

This shift has material implications: Warsh is perceived to be more hawkish or at least more independent, leading markets to recalibrate expectations regarding the pace and extent of rate cuts. A Warsh chairmanship could maintain higher for longer rates, especially if inflation risks re-emerge. There is also increased concern about the politicization of the Fed, as the Chair replacement process intersects with President Trump’s broader economic and tariff policies.

Monetary Policy Signals: Bowman’s Cautious Optimism Mix with Flexibility

In her Foxborough speech, Fed Vice Chair for Supervision Michelle Bowman signaled that while inflation is gradually heading toward the 2 percent target—especially once temporary tariff effects fade—she remains wary of the labor market slipping from near full employment into sharper weakness. She described policy as “moderately restrictive” and urged against signaling a pause without clear evidence that conditions have changed.

This suggests the Fed is inclined toward optionality: rate cuts are not off the table, but only conditional on sustained labor market strength. Markets will likely price in modest easing bets while retaining risk premia for unexpected shifts.

Trade Deal with Taiwan: Big Dollars, Strategic Stakes

The U.S.–Taiwan deal—committing Taiwanese tech and semiconductor firms to ≥US$250 billion in direct investment plus matching $250 billion in credit guarantees—combined with reciprocal tariff cuts and favorable import treatment under Section 232, aims to accelerate U.S. chipmaking capacity and reduce strategic dependencies.

Key beneficiaries include TSMC and its suppliers, especially in advanced nodes; however, Taiwan has explicitly resisted commitments to relocate its most advanced production (sub-2 nm) entirely to the U.S., underscoring the trade-off between domestic supply chain resilience and maintaining innovation leadership.

Strategic Implications and Open Questions

Markets are at a pivot: Fed leadership may influence policy direction sharply, and signals from committee members like Bowman reinforce that inflation progress is real but not irreversible. The Taiwan deal accelerates a longer-term supply-chain shift, but few details have been finalized. Key uncertainties include:

• The identity and policy leanings of the next Fed Chair (Warsh vs. Hassett or others) and whether the Fed can maintain its independence amid political pressure.
• Labor market trajectories—are recent softening trends transient or leading toward higher unemployment?
• Execution risk in the U.S.–Taiwan investment deal: site purchases, regulatory approvals, sourcing talent, transfer of advanced know-how, and whether U.S. policy frameworks (e.g., Section 232, tariffs, incentives) keep up.
• The inflation outlook: fading tariff drag may help, but risks from energy, supply bottlenecks, or labor compensation pressures persist, particularly if monetary policy eases too aggressively.