The Warsh Fed Will Look Nothing Like Before | Joseph Wang

Kevin Warsh's first FOMC statement as Fed chair was deliberately brief and hawkish, reflecting his longstanding criticism of Bernanke-era communication practices including the dot plot and press conferences. The final sentence, "the committee will deliver price stability," was read by Joseph Wang as a hawkish signal comparable in tone to Powell's Jackson Hole speech, and the statement alone tightened financial conditions and pushed rates higher without any actual rate change. On Warsh's first day, US equities sold off, the dollar rallied, two-year yields rose, and gold declined sharply, a market reaction Wang describes as consistent with Warsh presenting as hawkish from the outset.

The dot plot drove most of the hawkish market reaction before the press conference, with the SEP showing slightly more than one hike priced in for the current year. Warsh did not submit his own dot, so his personal rate path remains unknown by design. Wang was surprised by the hawkishness because Warsh, while auditioning for the chair role, had argued for rate cuts, cited AI productivity, and favored trimmed mean PCE as an inflation measure showing inflation coming down. Wang does not expect the Fed to hike this year. Month-to-month core CPI came in at 0.2 percent, standard central bank practice during negative energy supply shocks is to look through them, and falling energy prices provide a disinflationary tailwind. His base case is that the Fed holds rates throughout the year.

Warsh announced FOMC task forces covering communications, data measurement, AI and productivity, and balance sheet composition. Wang says these are not procedural exercises but are laying groundwork for major structural changes, and that task forces in bureaucratic organizations exist to build cover, buy-in, and a paper trail for significant decisions. Warsh also hired the author of the Fed chapter of Project 2025. On communications, Warsh has argued forward guidance was useful at the zero lower bound but not in the current environment, and signaled he may eliminate or reduce the SEP, limit Fed president public speaking, and hold fewer press conferences. Wang says consolidating messaging control in the chair role increases the chair's influence over policy, and that reducing forward guidance would create structurally more rate volatility. Governor Bowman supports more rate volatility on the grounds that it discourages excessive leverage, though Wang notes higher rate volatility would make basis trades harder to execute and reduce the market's capacity to absorb treasury issuance.

Warsh famously resigned as a Fed governor in the early 2010s over his opposition to quantitative easing, and Wang says shrinking the balance sheet is Warsh's lifelong goal. There is broad consensus within the Fed that the balance sheet should be treasury-only with no agency mortgage-backed securities, though the ultimate size remains contested. Shrinking the balance sheet requires the private sector to hold more treasuries, which demands more bank and repo market capacity. Wang points to the lifting of the Wells Fargo asset cap last year, after which Wells Fargo immediately began lending hundreds of billions more in repo, as an example of how regulatory changes can expand that capacity. He predicts significant balance sheet changes could come within a year or two, with upcoming revisions to bank capital requirements laying the groundwork. Whether to sell mortgage-backed securities outright or wait for them to mature over thirty years remains an open question.

A Fed data task force is examining whether current methods for measuring jobs and inflation remain accurate. Wang notes that jobs data revisions last year were so large that essentially all reported jobs were revised away, and flags a risk of politicization of economic data. He also notes that Warsh's preferred inflation measure, trimmed mean PCE, happens to be one of the lowest available measures, and acknowledges that after any modernization effort the conclusion could be that the existing PCE methodology was best all along.

Wang argues that monetary policy alone cannot reliably achieve inflation and employment objectives, though Fed chairs are institutionally required to speak as if it can. He points to AI companies with large cash reserves building out data centers regardless of interest rate levels as a concrete example of rate policy losing its grip on investment decisions. Controlling inflation, in his view, will require coordinated government action including tools like Strategic Petroleum Reserve releases and gasoline tax holidays. Wang sees a plausible outcome where the 2 percent point inflation target is replaced by a band such as 1 to 3 percent, and believes adopting such a band would in practice bias inflation higher over time.

Wang sees classic late-cycle speculative excess in equity markets, citing SpaceX losing a few billion dollars last year while trading at over a 2 trillion dollar valuation, and noting that Korea call option volume roughly doubled in the current year. Equity issuance is accelerating, with SpaceX lockup expirations, Anthropic, Google, and Super Micro all making or preparing offerings. He predicts a sustained and meaningful decline in risk assets, while acknowledging he did not anticipate the strong rally that followed the Iran war episode.