Markets are set for a much more hawkish Warsh Fed than expected
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- Kevin Warsh used his inaugural press conference as Fed Chairman to declare the FOMC "unambiguous and unanimous" on delivering price stability, using that phrase a dozen times in 40 minutes despite Trump having tapped him while repeatedly demanding lower rates.
- Treasury yields spiked as Warsh spoke, with the 2-year yield soaring and CME FedWatch showing a 67% probability of a September rate hike and 45%+ odds of a second hike by September 2027.
- Futures markets priced in a 4.78% fed funds rate by May 2031, implying as many as five rate hikes from the current 3.50%-3.75% target range.
- Ed Yardeni of Yardeni Research said he was "blown away," having expected a dove focused on AI productivity keeping inflation contained; instead, Warsh delivered "a strict, orthodox message on inflation."
- The hawkish shock reversed by Thursday as stocks rallied on positive Iran-war developments and falling energy costs — gasoline dipped below $4/gallon per AAA and S&P GSCI commodity prices fell 17% from their May peak.
- Scott Clemons of Brown Brothers Harriman predicted no rate hikes in 2025, citing election-year politics and Fed-politicization concerns, and noting core inflation rose just 0.2% in May.
- Cross-coverage shows Warsh already diverging from predecessor Jerome Powell by abstaining on new Fed stablecoin policies (per Decrypt) — institutional independence that extends beyond the inflation rhetoric dominant coverage focused on.
Why it matters: Trump installed Warsh expecting rate cuts, but Warsh immediately pivoted to inflation-fighting, repricing Treasury yields and pushing the implied 2031 fed funds rate to 4.78%. With core inflation at just 0.2% in May and 2025 being an election year, analysts like Scott Clemons expect the Fed won't actually hike — meaning Warsh's hawkish debut may end up as credibility theater rather than a genuine policy shift.
