The Warsh Fed Will Look Nothing Like Before | Joseph Wang

Kevin Warsh's first FOMC statement as Fed chair was notably brief and hawkish, with Wang describing the outcome as more hawkish than he expected given Warsh's public behavior while auditioning for the role. The statement contained very little forward guidance, and its final sentence, "the committee will deliver price stability," was singled out as a standout hawkish signal reminiscent of Powell's Jackson Hole speech. Warsh doubled down on the 2% inflation target and noted inflation has been above target for multiple years, yet the committee did not hike rates. Warsh achieved a tightening of financial conditions and a rise in market rates through communication alone, with the rate curve shifting upward at the front end and belly while the long bond declined slightly. Nine committee members are now projecting a rate hike, and the market is pricing in slightly more than one hike this year.

Despite the hawkish tone, Wang does not expect the Fed to hike rates this year. He cited falling energy prices as a disinflationary tailwind, noted that recent month-to-month core CPI came in at a tame 0.2 percent, and pointed out that standard central banking practice during negative supply shocks is to look through them. A potential equity market correction would further reduce justification for hiking. His base case is that the Fed holds rates throughout the year and revisits as data evolves, though he acknowledged that unpredictable geopolitical events keep emerging and make any base case subject to revision.

The most recent FOMC meeting produced a unanimous vote, contrasting sharply with the prior meeting which had four dissenters spanning both hawkish and dovish directions. Wang sees this consolidation of messaging as giving Warsh significantly more influence over the path of monetary policy. Warsh's own rate path projections remain unknown because he did not submit his own dot plot forecast, and Wang described Warsh's actual position on rates as deliberately unclear by design. Warsh announced task forces covering communications, AI productivity, data quality, and the balance sheet, and also hired the author of the Fed chapter of Project 2025. Wang described task forces in bureaucratic organizations as tools to build cover, buy-in, and a paper trail for major changes, arguing these are laying groundwork for large structural changes consistent with Warsh's public record over the past decade.

On communications, Warsh has long been a critic of practices introduced under Bernanke including the dot plot and press conferences, and suggested the Fed may not need the SEP or frequent press conferences. Wang argued that reducing forward guidance would create structurally more rate volatility in markets. Governor Bowman supports more rate volatility on the grounds that it discourages excessive leverage and could make markets more resilient, though Wang noted higher rate volatility would make basis trades more difficult to execute and reduce the market's capacity to absorb Treasury issuance. On the balance sheet, Warsh famously resigned as Fed governor in the early 2010s because he did not support quantitative easing. Wang predicted Warsh will build consensus toward a smaller Fed balance sheet, noting there is broad agreement across the Fed that it should hold only Treasuries and no agency mortgage-backed securities. A smaller balance sheet requires the private sector to hold more Treasuries, demanding more bank balance sheet capacity via repo financing, and Wang pointed to Wells Fargo immediately expanding repo lending by hundreds of billions of dollars after its asset cap was lifted last year as an example of how this transition could unfold.

Wang is most focused on the Fed task force examining the inflation target framework. Warsh has publicly stated inflation must return to 2% before any target changes are considered, which Wang reads as standard expectation management rather than a firm permanent commitment. Wang sees a plausible outcome where the task force produces an inflation band such as 1.5% to 2.5% or 1% to 3% in place of the current 2% point estimate, and notes that any shift to a band would structurally bias inflation higher relative to a strict 2% target, though he stops short of predicting it will happen. He also noted that trend mean inflation is Warsh's preferred inflation measure and happens to be one of the lowest available measures.

Wang sees several converging signals pointing toward a meaningful decline in risk assets. He cites SpaceX trading at over a 2 trillion dollar valuation despite losing several billion dollars last year and call option volume in Korea roughly doubling in the current year as examples of speculative excess. On the supply side, he points to upcoming equity issuance from SpaceX lockup expirations, Anthropic, a Google offering, and a Super Micro offering as sources of additional selling pressure. Wang combines these factors with hawkish Fed repricing to argue the setup favors a sustained and meaningful risk asset decline, while acknowledging he could be wrong and noting he incorrectly anticipated no strong rally following the Iran conflict.