How To Trade The New Warsh Fed | Bob Sheehan

Bob Sheehan argues that the Fed put, the longstanding assumption that the Federal Reserve will intervene with rate cuts and liquidity support during hard selloffs, has been meaningfully removed under Kevin Warsh. He contends this dynamic persisted through the tenures of prior chairs including Yellen, and that younger traders have never operated in a macro regime without it, making the current environment a genuinely new learning experience for much of the market.

Warsh has historically held more hawkish views and has signaled a desire to reduce forward guidance. The word count in Fed guidance was cut from approximately 340 to approximately 170 words, Warsh abstained from a dot plot, and fewer press conferences with potentially no dot plots going forward will make rate expectations more dynamic and harder to price into the curve. Nine out of 18 Fed officials jumped in rate hike expectations between September and December, illustrating increased internal Fed volatility that markets will need to absorb without the usual interpretive scaffolding.

Sheehan identifies two distinct trades under the new Warsh framework. The near-term trade, expected to dominate for approximately the next month, is a bear flattener, with the short end of the yield curve moving higher faster than the long end following recent inflation prints. The longer-term trade, measured in months to a couple of quarters, is a steepener driven by the long end, which he characterizes as primarily a supply and term premium story rather than a Fed story. Term premium is returning as a meaningful driver of long-end rates after a period of irrelevance, and foreign buyers of Treasuries are broadly dropping off relative to historical levels.

Sheehan flags that Warsh historically wanted a smaller Fed balance sheet and has been building task forces that provide cover for conclusions he may already be working toward. He emphasizes that balance sheet changes represent an actual change in money supply and the investable universe, not merely signals or words. He describes the balance sheet and liquidity complex as the hardest call in the current macro environment, and argues that balance sheet and reserve management purchases must now be analyzed separately from rate policy rather than treated as a single unified signal, as markets have grown accustomed to doing over the past decade.

Sheehan identifies fiscal policy as a dominant macro variable since 2021 and describes what he calls a fiscal doom loop. Yields rise, which increases interest payments on existing debt, which forces the government to issue more bonds to cover the shortfall, which pushes yields higher again. US interest expense on debt is at or near its highest level in a very long time, and tax receipts are currently running behind government expenditures, reinforcing the loop. He predicts that the fiscal imbalance combined with balance sheet dynamics will cause long-end rates to drift higher and create a less clear policy path going forward.

On equities, Sheehan is currently positioned more defensively with shorter duration exposure, favoring healthcare and staples over longer-duration tech names. He notes that gold sold off approximately 3 percent in a single recent session alongside Bitcoin, which he views as an unusual risk dislocation worth monitoring. He argues that reduced Fed guidance shifts analytical emphasis toward pure data study rather than behavioral interpretation of Fed commentary, and that without clear guidance, being on the correct side of a contrarian trade could pay off bigger, but interim fluctuations will also be larger.

Sheehan does not believe the dollar will collapse to zero or that devaluation is the inevitable endpoint of current fiscal dynamics. He frames the game as relative rather than absolute, arguing that Treasuries will continue to find buyers when compared against alternatives including Chinese assets. The core implication across his framework is that the removal of the Fed put, the reduction in guidance, the return of term premium, and the fiscal doom loop together constitute a structural regime change that requires traders to rebuild their analytical approach from the ground up rather than apply playbooks developed over the past decade.