May 2026
The new Federal Reserve Chairman, Kevin Warsh, last spoke publicly about policy at his April confirmation hearing. He expressed his plans to amend the Fed in several areas of operation. Specifically, he wants the Fed to return to their original dual mandate of full employment and price stability. He suggested that the committee had engaged in mission creep in studying climate-related, counterparty, and cybersecurity risks. All valid concerns but probably best left to Congress to debate.
Secondly, he wants to move away from flexible inflation targeting in which inflation is allowed to temporarily rise above the 2% target in an effort “juice the economy in times of slowdown.”
Thirdly, he is a proponent of the traditional method of controlling inflation through interest rate management, and he eschews the practice of quantitative easing as a tool. In fact, he said that he’s in favor of running down the Fed’s currently bloated balance sheet.
Finally, he is not a proponent of forward guidance and would like to do away with the so-called Dot Plot. He didn’t explicitly say it in his testimony but in earlier speeches he had said he thought the current overnight Fed Funds rate was too high.
We wholeheartedly agree with all of his points. For too long the Committee members have relished the spotlight of their public speeches. While the specific Dots of forward guidance are anonymous, it’s no secret who the outliers are.
A return to traditional interest rate management probably wouldn’t have spared us from the once-in-a-generation inflation we experienced in 2021 to 2023, but Powell’s cavalier attitude that it was “transitory” was flat wrong.
Fast forward to the June 17th FOMC meeting and the post-meeting press conference. Warsh is going to need to backtrack on his thought that the Fed Funds rate should be lowered. Given the current state of the economy which appears to be reaccelerating and inflation overheating again, bond desks are forecasting that the next Fed Funds move will be higher, not lower. Moreover, investors have repriced the entire yield curve to reflect that fact, with the 2-year note now 65 basis points higher than the 3.38% low touched in February. Given that massive repricing he’s going to need to backtrack on his wish to run down the Fed’s balance sheet. In accomplishing the rundown, the Fed effectively would be selling into the secondary market, pushing short maturity yields even higher.
While we think it’s highly unlikely that a rate hike is coming at the June 17th meeting, the Chairman should have prepared the market for a hawkish turn in the Committee’s preference. For sure, if Warsh presents a hawkish stance at his first press conference, the markets, both equities and bonds, are not going to like it.
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