Thoughts on Kevin Warsh's first FOMC meeting
The outcome of yesterday’s FOMC meeting was much more hawkish than the market and I expected. The median dot projections moved up by about 25 bp in both 2026 and 2027, and the market now prices in two rate hikes by next March. Warsh’s own dot was notably absent.
Warsh’s first meeting delivered a clear change in tone and also marked the start of a broader regime change within the Fed that will shape how it operates and makes decisions for years. The official statement was much shorter than usual, and Warsh expressed a strong dislike for excessive transparency and forward guidance. The removal of forward guidance is one of the most immediate and impactful changes of his tenure. Some commentators argue that less guidance will increase rate volatility. The reality is more nuanced: baseline volatility may rise, while the market may avoid sudden shocks that occur when it drifts into complacency and then has to reprice quickly.
Case in point: throughout 2020 and 2021 the Fed was worried about deflation and guided the market to expect rates at 0% for the foreseeable future. The market took the Fed at its word and was slow to price in the aggressive rate hike cycle that followed the extreme demand and supply shock which pushed inflation to 9%. The speed and violence of that cycle contributed to the 2022–2023 equity bear market and the collapse of Silicon Valley Bank. Warsh captured the issue well:
Financial market prices are probably the most important source of information to guide central bankers. But when all the financial markets are doing is reflecting back what we’ve said, then we’re taking the most important source of information and we’re being blind to it. I’d like us to create a system where those blinders come off, where markets are following data that they efficiently think is reliable, and they’ll be watching data, we’ll be watching data, they’ll come with better information through market prices to us.
During the press conference, he repeated two key phrases that framed his remarks and offered clues on how he plans to shape the Fed.
“Price stability” - mentioned 9 times in the press conference
Warsh needed to establish his credibility as an inflation fighter and avoid the perception that he serves as a Trump lackey. He knows, as we all do, that maintaining demand for US Treasuries requires a credible and independent Fed. The muted reaction in Treasuries with maturities of seven years or more suggests that the market remains unconcerned about runaway inflation or a sharp rise in term premium.
“Task force” - mentioned 16 times
Warsh’s goals for overhauling the Fed are ambitious, and he needs evidence, consensus, and political cover to implement them. Task forces provide that structure. The targeted areas are:
Fed communications; second, the Fed’s balance sheet; third, our use and reliance on existing data sources; fourth, productivity and jobs in an era of transformation; and last, the Fed’s inflation frameworks.
Basically everything the Fed does!
Each area matters in its own way. The data the Fed relies on is often lagged (rent data can lag by 6–18 months) and subject to frequent revision (especially employment data). Quality and timeliness are particularly poor around turning points in the US economy. I would not be surprised if the Fed develops and relies on alternative inflation measures that better serve its decision-making needs.
The Fed’s inflation framework also needs rethinking. Members hold widely conflicting views on how to respond to supply-side shocks, which has led to paralysis and policy mistakes.
Takeaways for traders and investors
Despite the surprisingly hawkish tone, I do not think this marks the start of an aggressive hiking cycle, and I do not think it will derail the equity bull market. The 2027 dots shifted from projecting a cut to projecting a 25 bp hike, not a long series of hikes. One or two hikes would take Fed funds to roughly 4% versus core PCE at 3.3%, a zone that looks neutral to mildly restrictive for inflation.
From here, inflation data should provide a tailwind for the market as shelter inflation, lower energy prices, and base effects from the 2025 tariff shock help both headline and core inflation move lower.
Joseph Wang offered great analysis on the FOMC as always
Disclaimer: The content of this newsletter is provided for informational and educational purposes only and should not be construed as professional financial advice, investment recommendations, or a solicitation to buy or sell any securities or instruments. The newsletter is not a trade signaling service and the author strongly discourages readers from following his trades without experience and doing research on those markets. The author of this newsletter is not a registered investment advisor or financial planner. The information presented on this newsletter is based on his own research and experience, and should not be considered as personalized investment advice. Any investment or trading decisions you make based on the content of this newsletter are at your own risk. Past performance is not indicative of future results. All investments carry the risk of loss, and there is no guarantee that any trade or strategy discussed in this newsletter will be profitable or suitable for your specific situation. The author of this newsletter disclaims any and all liability relating to any actions taken or not taken based on the content of this newsletter. The author of this newsletter is not responsible for any losses, damages, or liabilities that may arise from the use or misuse of the information provided.