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This article is based on insights shared by Michael Knox, Chief Economist, in a recent video presentation. To hear the full commentary in his own words, please watch the video above.

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Who Could Replace Jay Powell as Fed Chair and What It Means for US Interest Rates

Key summary

• Jay Powell’s term as Chair of the US Federal Reserve ends in late May, ahead of the June FOMC meeting.
• Markets are focused on two leading contenders: Kevin Hassett and Kevin Warsh.
• Both candidates are highly qualified, but Warsh has prior experience as a Fed Governor, including during the Global Financial Crisis.
• Our Fed Funds rate model explains around 90% of the monthly variation in the policy rate.
• While a January rate cut looks unlikely, further easing is expected later in 2026 as US employment growth weakens.

Why the Fed Chair succession matters

The Chair of the Federal Reserve is one of the most powerful economic roles in the world. Decisions made by the Fed shape global interest rates, asset valuations and financial stability.

With Jay Powell’s term ending in May, the US President will need to nominate a successor ahead of the June 16 to 17 FOMC meeting, with confirmation required from the US Senate. That timeline has brought renewed attention to the potential direction of US monetary policy over the next year.

Powell leaves behind a strong reputation. He is widely regarded as an excellent Chair, highly credible, a skilled consensus manager, and well respected by other central bankers. Market participants and policymakers who have dealt with him consistently describe him as pragmatic, measured and effective under pressure.

The two leading contenders

Media coverage and betting markets currently point to two frontrunners: Kevin Hassett and Kevin Warsh.

Both are highly capable candidates, but their professional backgrounds differ in ways that matter for monetary policy.

Kevin Hassett: senior economic policy experience

Kevin Hassett was born in 1963 and grew up in Greenfield, Massachusetts. He studied economics throughout his academic career, earning an undergraduate degree in Pennsylvania before completing a PhD at the University of Pennsylvania.

Hassett has also been influential outside academia. His 1999 book Dow 36,000 argued that equity markets would rise substantially over the long term and became a major bestseller.

Many investors first encountered Hassett while he served as Chair of the Council of Economic Advisers during Donald Trump’s first term. In early 2018, he appeared before the American Economic Association and debated Jason Furman, the former Chair of the Council under President Obama.

Today, Hassett holds an even more senior role. He is Director of the National Economic Council of the United States in the current administration, a position with Cabinet level status. In practical terms, he briefs the US Cabinet on economic conditions and policy developments, making him one of the most influential economists in American policy circles.

Kevin Warsh: deep Fed and markets experience

Kevin Warsh was born on 13 April 1970 in Albany, New York, the state capital.

Rather than following the traditional East Coast academic pathway, Warsh studied at Stanford University, earning a degree in public policy. He then returned east to complete Harvard Law School, graduating in 1995, before continuing his studies at Harvard Business School and MIT, focusing on economics and public policy.

That academic background led him to Morgan Stanley in 1995, where he rose to Executive Director by 2002.

Warsh entered public service during the George W. Bush administration, serving as Executive Secretary of the National Economic Council. In February 2006, he was appointed a Governor of the Federal Reserve, beginning a 14 year term and becoming the youngest Fed Governor in history, at just 35.

Warsh and the Global Financial Crisis

Warsh’s time at the Fed coincided with the Global Financial Crisis, when he served alongside then Chair Ben Bernanke.

Bernanke later noted that Warsh’s deep knowledge of Wall Street and extensive industry contacts were invaluable during the crisis, helping policymakers navigate a collapsing financial system.

One of the most influential speeches of that period was delivered by Warsh in New York on 14 April 2009. In it, he described how liquidity, long taken for granted by large financial institutions, suddenly vanished.

He famously compared institutions to fish swimming in water:

“Fish don’t know they are wet, and they won’t learn until the water is gone.”

The speech captured the psychological shock of the crisis, not just the economic one. Alongside Raghuram Rajan’s 2005 Jackson Hole speech, which correctly warned that financial innovation and asset backed securities would lead to instability, Warsh’s remarks remain among the most important documents for understanding the crisis.

Who is more likely to become Fed Chair?

While both candidates are strong, Kevin Warsh now appears to be narrowly leading in betting markets.

The distinction between the two is clear:

• Warsh has served as a Federal Reserve Governor.
• Hassett has not.

That experience gives Warsh a deeper understanding of financial markets, crisis dynamics and the internal workings of the Fed. In my view, if appointed, Warsh would be an outstanding Chair.

What the Fed Funds model is signalling

Our Fed Funds rate model explains roughly 90% of the monthly variation in the policy rate over time, making it a useful guide to current policy settings.

The key issue confronting the Fed in 2026 is employment growth.

Jay Powell has already flagged this risk publicly, noting at Jackson Hole that US employment growth has begun to slow sharply. Recent data show payroll growth running at just 0.4 percent, only marginally positive and historically consistent with late cycle risk.

January decision and outlook for 2026

Despite the slowing labour market, our model currently estimates the equilibrium Fed Funds rate at around 3.49 percent, compared with an effective rate near 3.6 percent.

That suggests:

• A rate cut at the January meeting is unlikely.
• Policy remains slightly restrictive but not dramatically so.

However, the bigger picture matters. If employment growth continues to decelerate, as recent trends suggest, the equilibrium rate will fall further.

In that scenario, the Fed will need to deliver additional rate cuts later in 2026 to generate genuine stimulus and support the US economy.

FAQs

When does Jay Powell’s term as Fed Chair end?

Jay Powell’s term ends in late May, ahead of the June FOMC meeting.

Who are the leading candidates to replace him?

The two leading contenders are Kevin Hassett and Kevin Warsh.

Why does Kevin Warsh have an advantage?

Warsh has prior experience as a Federal Reserve Governor, including during the Global Financial Crisis.

Is a January rate cut likely?

Based on current data and model estimates, a January cut appears unlikely.

Will the Fed cut rates later in 2026?

Yes. Continued slowing in US employment growth suggests further rate cuts are likely as the year progresses.

Conclusion and next steps

The impending change at the top of the Federal Reserve comes at a delicate moment for the US economy. Slowing employment growth and late cycle dynamics point toward an easing bias, regardless of who ultimately takes the Chair role.

While the Fed may remain on hold in the near term, the direction of travel is clear. Monetary policy is likely to become more accommodative through 2026.

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Want to discuss how this impacts your portfolio?

DISCLAIMER: Information is of a general nature only. Before making any financial decisions, you should consult with an experienced professional to obtain advice specific to your circumstances.

Key Summaries

• Shares vs property investment Australia comparisons often rely on misleading house price data
• Property returns usually ignore decades of renovation, rebuild, and holding costs
• Share market returns already account for reinvestment and operating expenses
• Net rental income is far lower than most investors expect
• When compared fairly, shares have historically delivered stronger long-term returns

Why property appears as an attractive investment

Charts showing soaring Australian house prices regularly circulate in the media and on social platforms. At first glance, they make property appear unbeatable. The gains look massive, tangible, and reassuring. However, these comparisons have flaws.

Most property vs shares debates compare raw house prices with share market returns, without accounting for the hidden costs of owning property. When those costs are included, the investment story changes dramatically.

Why raw house price data can be misleading

Unlike shares, residential property physically depreciates over time. The Australian Taxation Office estimates that residential buildings have an effective lifespan of approximately 25 to 40 years¹, during which significant capital expenditure is typically required to maintain functionality and value.

House price charts, however, reflect only the sale price of a property at a specific point in time. They do not account for renovation expenses, major repairs or rebuilds, ongoing maintenance, or the holding and transaction costs incurred throughout the ownership period².

By contrast, share market returns are reported after companies have already absorbed the costs of reinvestment, staffing, equipment and business expansion^5,6. This structural difference is a key reason why property investment performance is often overstated when compared to shares.

The ongoing costs of property ownership

Property investors face a range of ongoing expenses that share investors simply do not encounter. These holding costs include, but are not limited to, council rates, insurance, maintenance and repairs, body corporate fees, land tax and periods of vacancy when no rental income is received.

According to estimates from the Reserve Bank of Australia (RBA), basic holding costs for residential property average around 2.6% per year², even before accounting for financing costs. When this is compared to current gross rental yields of approximately 3%³, the result is often a near-zero net yield once expenses are deducted.

In practice, this means that a large portion of rental income, even for properties that appear cash-flow positive on paper, is frequently absorbed by ongoing maintenance and ownership costs rather than generating meaningful surplus income.

In the current property market environment, many investors also rely on negative gearing, where rental income is insufficient to cover loan repayments and expenses. As a result, investors must regularly contribute additional personal funds to service the shortfall, placing further pressure on cash flow. Not to forget, the significant transaction costs of these investments, such as stamp duty, solicitor fees, building and pest reports and buyer’s agent fees.

Adding to this, investment properties are commonly financed using interest-only loans, particularly in the early years. While this may reduce short-term repayments, it means no principal is being repaid during the interest-only period. This increases the investor’s long-term capital requirements and leaves returns heavily dependent on future capital growth rather than income.

How shares work differently to property

Shares function very differently from property investments. Long-term performance figures for major share market indices such as the ASX 300, S&P 500, and Nasdaq already reflect the ongoing reinvestment required to keep businesses operating and growing ^5,6. Costs associated with replacing assets, upgrading technology, paying staff, and expanding operations are absorbed at the company level and are accounted for before returns reach investors.

For income-producing shares, dividends are distributed only after all business expenses have been covered. In Australia, franking credits can further enhance after-tax returns⁸, and investors have the flexibility to reinvest this income or use it to support living expenses in retirement. This structure makes shares significantly more efficient from a cash flow perspective.

When assessed on a like-for-like basis, shares have historically produced higher net returns than property, while requiring less hands-on management and offering greater diversification, which helps reduce overall investment risk⁷.

Why this matters for Australian Investors

Australians have gained significant wealth through property ownership, particularly in recent years during periods of strong price growth⁴. However, strong historical performance does not automatically mean property will continue to be the superior investment in all market conditions.

A clear understanding of the true cost structure of property investing allows investors to set more realistic return expectations, create more balanced and diversified portfolios, and make more informed financial planning decisions throughout their working years and into retirement.

Final thoughts

Property is not a passive, set-and-forget investment. Over time, it depreciates, requires ongoing capital expenditure, and demands regular maintenance. Shares, by contrast, incorporate reinvestment within their returns and provide income to investors after business costs have been met^5,6.

When assessed on a like-for-like basis, shares have historically delivered stronger long-term performance than property, while requiring less effort, involving lower ongoing costs, and offering greater access to diversification.

If you would like to discuss your investmemt options, please contact a Morgans Financial Adviser. Please note, A Morgans Adviser cannot provide advice on an Investment property.

Frequently Asked Questions

Is property still a good investment in Australia? Yes, but it should not be viewed in isolation. Property can play a role, but the narrative that it outperforms shares is not necessarily the case. The total net costs of both investments need to be included.

Why do house price charts look so impressive? They ignore renovation, rebuild, and maintenance costs, making growth appear higher than reality ^1,2.

Are shares riskier than property? Shares fluctuate more short-term, but property carries concentration, liquidity, and capital risk that is often underestimated⁷.

What is the biggest hidden cost in property investing? Capital reinvestment over time, including major renovations and rebuilds, which are rarely factored into returns ^1,2.

Which performs better long term: shares vs property investment Australia? Historically, diversified shares have delivered higher net returns with lower ongoing costs ^5,6,7.

References

_{1. Australian Taxation Office (ATO) – Capital works deductions and effective life of buildings https://www.ato.gov.au/Individuals/Investing/Investing-in-property/}

_{2. Reserve Bank of Australia (RBA) – Housing and Housing Finance Statistics ttps://www.rba.gov.au/statistics/housing.html}

_{3. CoreLogic – Australian Housing Market & Rental Yield Data https://www.corelogic.com.au}

_{4. Australian Bureau of Statistics (ABS) – Residential Property Price Indexes https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/residential-property-price-indexes-eight-capital-cities}

_{5. ASX – Long-term Investment Returns and Dividends https://www.asx.com.au/investors/investment-tools-and-resources/education/shares}

_{6. Vanguard – Index Chart® and Long-Term Market Returns https://www.vanguard.com.au/personal/learn}

_{7. Australian Securities & Investments Commission (ASIC) – Shares, Property and Diversification https://asic.gov.au/investors/}

_{8. ATO – Dividend Income and Franking Credits https://www.ato.gov.au/Individuals/Investing/Investing-in-shares/}

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Australia’s households could face higher electricity costs and rising inflation in 2025. With electricity subsidies ending and energy supply constraints persisting, the Reserve Bank of Australia (RBA) may be forced to lift interest rates. Here’s what you need to know.

Key Summaries

• Retail electricity subsidies worth $9 billion per year are being phased out.
• Retail electricity prices are expected to rise sharply in 2025.
• Inflation could accelerate to 4% or more in the second half of the year.
• RBA may then need to make three 25-basis-point rate hikes.
• The cost of renewable energy is not just the cost of wind and solar,
  natural gas is also needed to stabilise renewable energy.

Why Are Electricity Prices Rising?‍

The government’s decision to remove $9 billion in electricity subsidies will expose households to the true cost of power. Over the past two years, wholesale electricity generation costs have surged by 23%, driven by supply constraints and reduced capacity in New South Wales.
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How Will This Impact Inflation?‍

Electricity prices feed directly into the Consumer Price Index (CPI) with a lag of around two quarters. As subsidies end, retail prices will rise, pushing inflation higher, especially in the second half of 2025. Businesses will face increased costs and pass these on to consumers.‍
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Interest Rates: RBA’s Likely Response‍

Higher inflation means the RBA will need to act. While some banks forecast small rate hikes early in the year, Morgans expects three 25-basis-point increases in the second half of 2025. This could significantly impact mortgage holders and borrowing costs.
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The Role of Renewable Energy and Gas Pricing‍

Despite claims that renewables are the cheapest energy source, electricity prices remain high because consumers need power 100% of the time. The marginal cost of electricity is set by natural gas, which stabilises supply when renewables cannot meet demand. Global gas prices, influenced by events such as the war in Ukraine, ultimately determine the cost of electricity in Australia.

FAQs

Why are electricity prices increasing in Australia?‍

Because subsidies are ending and generation costs have risen by 23% over the last two years.

How will this affect inflation?‍

Consumer prices could rise by 4% in the second half of 2025 as higher energy costs flow through the economy.

Will interest rates go up?‍

Yes, the RBA may raise rates three times in the second half of 2025 to curb inflation.

Are renewables making electricity cheaper?‍

Not necessarily. Prices are influenced by natural gas, which sets the marginal cost of supply.

What does this mean for households?‍

Expect higher power bills and increased mortgage costs if rates rise.
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Australia faces a challenging year ahead with rising electricity costs, accelerating inflation, and likely interest rate hikes. Planning ahead is essential for households and investors.

Want to discuss how this impacts your portfolio?

DISCLAIMER: Information is of a general nature only. Before making any financial decisions, you should consult with an experienced professional to obtain advice specific to your circumstances.