WSJ Warsh Signaling
The announcement of Warsh is a somewhat tradable event: positive for bank shares, low-end terminal probably gets brought forward.
Kevin Warsh is out with a piece in the WSJ detailing what’s wrong with the Fed, what’s right with the current administration policies, and how he would approach the position of Fed Chair. He was probably asked to write this as a market signaling strategy by people who have decided he will be the chosen one. That way, when he gets announced, the market at least has a framework/expectation.
I have detailed why I suspect he will be chosen. I have also detailed the 2026 risks around short-end issuance and a Fed chair who wants to reduce the balance sheet with rates below neutral. Here are just some thoughts/notes on him in the role.
Policy Summary, Warsh Bias, Implications
(Policy 1) Forecast adjustments: get rid of sticky inflation bias and assume AI/productivity growth will lead to lower structural inflation and higher trend growth:
Dovish reaction function in 2026 pricing: short-run policy rate drops, long-run neutral goes up a bit
Current lower-end terminal pricing is 3% in March 2027. That can be brought forward by a few meetings and lowered maybe 50bps. Current pricing does not make much sense unless you think Powell will remain chair, which he will not!
Greater emphasis on money supply growth / fiscal policy as an inflation precursor vs. Fed rates. If Congress/spending is gridlocked, the Fed will be looser and faster than usual cycles. If Congress is aligned and spending, the Fed may go tighter and earlier than usual cycles.
(Policy 2) War on the balance sheet: QT + low Fed Funds
Warsh sees mid-late cycle QE as a mechanism that makes Wall Street liquidity abundant, distorts lending incentives, and takes credit availability from households.
Attempting to operate a clean tradeoff (QT + below neutral policy rates) seems hard, particularly as the US has a ton of issuance in 2026. Maybe they could let MBS and long-dated TY rolloff and do large bill reivestments? Coordinate with Treasury on issuance timelines/tenors? When this experiment fails, the SRF is there.
(This all might just be lip service in order to gain the support of supply-side hedge fund guys who are likely advising officials on the decision.)
Dudley lays out how this policy is super disruptive.
(Policy 3) Unwind of GFC stuff: Walk away from Basel, replace with a US-friendly framework, loosen capital constraints
A tradeable event. Good for bank stocks. XLF
(Warsh Bias 1) He is a supply-side contrarian macro guy… a student of Soros’ Theory of Reflexivity (i.e. prices influence fundamentals, fundamentals change expectations, expectations influence prices). Most folks in leadership positions at the Fed (career academics, or those who strongly defer to them) do not operate policy this way.
This belief system means the Fed is going to take a more active role in determining the outcomes themselves (instead of waiting for data confirmation all the time)
How the old Fed ignores reflexivity: take, for example, the 2023/2024 situation. Every time the Fed made progress on inflation, they would get happy and put out dovish forward guidance. Markets and animal spirits would then rip, and they would make less progress on inflation and have to back track.
Forward guidance could have a big adjustment. More ‘action’ vs. ‘talk’ opens the door for greater policy volatility and opportunity. Someone operating with a reflexivity bias doesn’t see value in forward guidance, as the guidance itself is influencing the end outcome. This person would say that the Fed isn’t wrong all the time because they are bad at forecasting… they’re wrong because they are influencing future events due to releasing a forecast in the first place. It’s like the grandfather paradox, but in economics.
(Warsh bias 2) He is a markets guy who is friends with macro legends and prides himself on market connectivity. It’s like combing the pre-GFC versions of Robert Rubin + Tim Geithner, with a dash of QE era hedge fund contrarianism.
It’s probably as simple as… looser capital constraints and running it hot = bank stocks higher?
Higher fixed income volatility due to changes in forward guidance and abrubt decision making.
(Warsh bias 3) I am not 100% sure on this one, but I suspect someone with his resume may not be as aggressive on China. There are not a lot of people who have his pedigree/resume who then go on to rock the establishment boat internationally.
Stanford, MS, Bilderberg, CBO, Treasury, Harvard, NEC, Hoover… this is as establishment as it gets… Usually, these folks want to be well-liked by captains of industry… and taking aggressive action internationally is not popular with these people/places.
I am not writing a piece on Kevin Hassett as there has been no major signaling in his direction… and his policy would just be an extension of the WH plain and simple (and probably quite USD negative, metals positive). ¯\_(ツ)_/¯