Warsh's First Fed Test: 30-Year Yield Hits 5.11%
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- 30-year Treasury yields surged to 5.11%—their highest level since 2007—up from 4.63% at the end of February, as global investors demand higher compensation to absorb massive fiscal deficits and AI-related capital needs.
- Kevin Warsh won Senate confirmation last week but has not been sworn in; he awaits a formal presidential commission and is liquidating assets to meet ethics rules, leaving Jerome Powell serving as chair pro tempore in the interim.
- Two Fed governors—Michelle Bowman and Stephen Miran—dissented from the Board's decision, saying they wanted an explicit time limit on how long Powell can serve in the interim role.
- Bond markets are pricing 2.7% annual inflation over the next five years—the highest since 2023, up from 2.2% at year's end—accounting for roughly the entire run-up in five-year yields over that span.
- Warsh's signature thesis holds that AI productivity gains will be disinflationary and give the Fed room to cut, but the AI capex boom is currently offsetting the traditional growth-dampening effect of an oil shock.
- The Iran war has driven up energy prices and inflation, but the U.S.'s net-exporter status and resilient AI-fueled demand are breaking the traditional oil-shock playbook in which a supply crunch would slow the economy enough to justify rate cuts.
- Ed Yardeni of Yardeni Research wrote that a more hawkish Warsh than markets expect could stop yields from rising, arguing that "by acting hawkishly, Warsh might have a chance of delivering what the White House wants: lower real-world borrowing costs."
Why it matters: Warsh's defining view—that AI will be disinflationary and justify rate cuts—faces an immediate stress test before he even takes the oath: bond traders are pricing 2.7% inflation over five years and 30-year yields are at their highest since 2007. Cutting would risk unmooring those expectations further; hiking would mean breaking with the White House that just installed him.
