The new Federal Reserve (Fed) Chairman, Kevin Warsh, seems to have managed to steal the attention of global markets in his inaugural speech at the ECB Central Banking Forum held in Sintra, Portugal.
In the speech, Warsh brought several important narratives that made the bond market party for a while, while Forex and stock traders began to rearrange their strategies.
Here are 5 important points from Kevin Warsh’s speech that you must know:
1. Inflation Risks Start to ‘Cool’, 2-Year Bond Yields Fall
Warsh brought good news when he stated that inflation risks and price expectations in the market have started to show a decline over the past four weeks. Among the main factors is the sudden fall in energy and gasoline prices due to the US-Iran peace talks.
Although the latest PCE inflation data is still at 4.1% (Core PCE 3.4%), Warsh’s optimistic statement has pushed the US bond yield (US Treasury Yield) to a session low of around 4.15%. He also vowed, “We will ensure that price stability returns to the US, that is our absolute objective.”
2. Hide ‘Hint’: “Don’t Expect Me to Give Forward Guidance!”
For those of you looking for a clue as to whether the Fed will raise interest rates at the July 28-29 meeting, sorry… you’ll have to bite your finger. Warsh officially insisted that the era of giving forward guidance is over because it is not appropriate for the current economic situation.
When the moderator tried to bait me with whether the outcome of the meeting in four weeks would be a rate hike, Warsh jokingly replied:
“He’s trying to get me to break the rules (no forward guidance), but he’s going to fail.” However, he hinted that he wants to see a ‘good family fight’ between FOMC members at the meeting to determine the best course of action.
3. Fed Remains Independent, Ignoring Trump’s Political Pressure
Although President Donald Trump has openly called for aggressive interest rate cuts, Warsh has staunchly defended the central bank’s autonomy.
“We have been an independent central bank for a long time. We will remain independent for now and you will not see any change in that,” he stressed.
4. Plan to Shrink the ‘Balance Sheet’ ($6.7 Trillion) Will Take a Long Time
Warsh made no secret of his desire to shrink the Fed’s bond portfolio (balance sheet) which currently stands at $6.7 trillion. However, he warned that this process will not happen overnight.
“It took us 18 years to grow this balance sheet… so it will take more than 18 weeks to shrink it again,” Warsh said.
Wall Street expects this plan to only begin at the end of 2027 through a very slow process. This is because if the Fed shrinks this portfolio too quickly, the market faces the risk of a liquidity shortage that could ‘explode’ the short-term loan market (repo market).
Warsh also announced the line-up of outside experts for the Fed’s five new task forces (including communications and inflation) to be announced next week.
5. AI Revolution: Just in the First Inning!
Regarding the frenzied rally in the Artificial Intelligence (AI) sector, Warsh believes it is too early to judge whether this AI investment boom will trigger broader inflation.
Instead, he sees AI as a paradigm shift that will boost the productivity of the global economic supply chain.
“We are only in the first or second innings of this revolution. My guess is that six months from now, business surveys will show a much more dramatic impact of AI than they do today,” he commented.
Conclusion for Traders: Kevin Warsh clearly wants to separate the Fed from its old way of working that relied too much on forward guidance. With the market now betting on at least one rate hike (25 bps) by the end of 2026, the market will become very sensitive (data dependent) to every economic data release starting this week.
Do you think Warsh's action to revise forward guidance will make the market more predictable or will it become more whipsaw-like?
