How To Trade The New Warsh Fed | Bob Sheehan

Bob Sheehan founded Lighthouse Macro at the end of January of the current year, drawing on experience running a roughly one billion to one point two billion dollar large cap macro equity strategy at Bank of America, working at Trahan Macro, trading at discretionary global macro hedge fund Strom Capital Management, and providing macro analysis on short sale data at EquaLend, whose clients included BlackRock and the California Teachers Retirement Fund. The firm's stated approach is to put quantitative data behind every assertion and to identify in advance what evidence would disprove a given view.

Sheehan's central argument is that the Fed put is dead or meaningfully diminished under Kevin Warsh. The Fed put, the assumption that the Fed will cut rates and provide liquidity support during hard selloffs, held through the tenures of Yellen and subsequent chairs, meaning younger traders may have never operated in a macro regime without it. Warsh has historically held hawkish views, abstained from a dot plot, and cut the word count of Fed guidance from approximately 340 to approximately 170, all of which Sheehan treats as evidence of a structural shift rather than a stylistic one.

Reduced forward guidance is expected to produce more volatility in how rate expectations get priced, because fewer guardrails allow a wider range of outcomes and more disagreement among traders. Nine out of 18 Fed officials jumped in rate hike expectations in September and December, which Sheehan cites as evidence of increased internal disagreement already visible in the data. With less Fed commentary to filter economic releases through, he argues traders should evaluate data on a pure historical basis, parse shorter statements of roughly 120 words more carefully, and be quicker to cut risk rather than reflexively buying selloffs.

Sheehan identifies two distinct trades under the Warsh framework. The near-term trade, expected to play out over roughly the next month, is a bear flattener in which the short end of the yield curve moves higher faster than the long end, driven by recent inflation prints and repriced rate cut expectations. The longer-term trade, measured in months to a couple of quarters, is a steepener driven by the long end moving higher on supply and term premium dynamics rather than Fed policy. Foreign buyers of Treasuries are broadly dropping off relative to historical levels, supporting the long-end supply story. Warsh's ambiguous task force approach to balance sheet reduction adds further uncertainty because balance sheet changes represent an actual change in money supply and the investable universe, not merely words, and Sheehan argues traders must analyze balance sheet and reserve management purchases as a separate signal from rate policy rather than treating them as a single unified indicator.

Sheehan identifies fiscal policy as the dominant macro force since 2021 and describes a fiscal doom loop in which rising yields increase US interest expense, which requires more bond issuance, which puts further upward pressure on yields. US interest expense on its debt is at or near its highest level in a very long time, and current tax receipts are running behind government expenditures, making the loop self-reinforcing and creating persistent pressure on the long end of the yield curve.

While some commentators predict the dollar will fall to zero based on these fiscal dynamics, Sheehan rejects that framing as unrealistic. He insists all macro analysis must be conducted in relative rather than absolute terms, meaning the dollar's trajectory can only be assessed against competitors such as China and against oil market dynamics. Fiscal and balance sheet stress creates a less clear path for the dollar but does not produce a predetermined outcome in isolation.

In equities, Sheehan is positioned more defensively with shorter-duration exposure, preferring healthcare and staples over longer-duration technology names. He also flagged a recent dislocation in which both Bitcoin and gold sold off simultaneously, with gold falling approximately 3 percent in a single session, describing this as inconsistent with historical patterns and a signal worth monitoring given the broader uncertainty around Fed communication, fiscal dynamics, and the repricing of rate expectations across the curve.