Source: Wall Street News
Trump chose Warsh to cut interest rates. But on May 15, when Warsh officially took over the chair left by Jerome Powell, he inherited not a Fed ready to cut rates at any time, but an FOMC where three governors disagreed even with the suggestion that a rate cut might be possible next time .
The three dissenting votes—Hammack of Cleveland, Kashkari of Minneapolis, and Logan of Dallas—cast the most unusual dissent since October 1992 at the meeting at the end of April. They weren't against a rate cut, but against the "soft tone." They argued that in the current inflationary environment, even hints of a rate cut shouldn't exist.
Warsh took over a central bank that was on the verge of tearing itself apart from within.
1. A person misunderstood by the market
The market's mainstream characterization of Walsh comes from two unreliable sources.
First: Trump elected him because he wanted to cut interest rates. The logic was—if he was elected, he would cut rates. Second: During the confirmation hearing, Warsh showed some agreement with the statement that "the Iranian oil shock is temporary," which was interpreted as a dovish signal.
Both of these inferences skip over the most authentic side of Walsh over the past fifteen years.
In November 2010, the Federal Reserve was discussing QE2—whether to purchase another $600 billion in Treasury bonds. Warsh voted in favor that day. That same week, he published an article in the Wall Street Journal criticizing QE2. Voting in favor and writing against it was extremely rare in Fed history, and later researchers called it "silent dissent"—not genuine agreement, but simply not wanting to undermine the consensus.
At that time, core PCE never exceeded 2.5%, and the unemployment rate was as high as 10%. There was no obvious inflationary pressure, but between 2006 and 2011, Warsh gave 13 speeches specifically mentioning the "upside risks to inflation." While other board members were still discussing how to support employment, he was already worried about an enemy that had not yet appeared.
The enemy is now at the door. April's CPI reached 3.8%, a three-year high. The energy shock from the Iran war caused gasoline prices to rise 28.4% year-on-year, and fuel prices to rise 54.3%. In Warsh's first week in charge, the 30-year Treasury yield just touched 5.19%, only a step away from the 2007 high.
2. Inflation is not just a problem in Iran.
There's a reasonable core to the dovish argument: the Iranian oil shock is an exogenous event. Once the Hormuz negotiations make progress, oil prices will fall from over $100 to $75-80, energy inflation will subside quickly, CPI figures will naturally improve, and Walsh will have a window to cut interest rates.
This logic holds true. However, one line in the April inflation data makes it less clean.
Services inflation jumped to +0.5% month-over-month in April. In March, the figure was +0.2%.
Gasoline doesn't account for much of the inflation in the service sector. Price increases in food, healthcare, transportation, and entertainment are not directly related to the Hormuz index. The housing sub-index rose 0.6% month-on-month, more than doubling its contribution. Excluding food and energy, the core CPI rose 0.4% month-on-month in April, the fastest monthly increase since the end of 2025.
In other words, inflation is spreading from the energy sector to the services sector. Once this process begins, even if oil prices fall back to $80 tomorrow, price pressures in the services sector will not disappear within two or three months.
This is exactly the same path the Fed took in 2022 when it misjudged the "temporary" nature of inflation. Back then, Powell said inflation was temporary, but by the time he realized service sector stickiness had formed, he could only try to fix the problem with the most aggressive interest rate hike cycle. Warsh has historically been more aware of inflation than the market—and this time, he's unlikely to make the same mistake again.
3. The FOMC he inherited
There's another thing the market hasn't fully priced in: the Fed that Walsh took over was internally divided to an unusual degree.
The meeting on April 28-29 maintained the interest rate unchanged, ostensibly a result of an 8-4 vote. An 8-4 vote is inherently unusual—the last time four dissenting votes occurred was in October 1992. But more subtle is the direction of these four votes: three against implied a rate cut, while one vote supported one. There were two opposing viewpoints within the Board of Governors simultaneously.
In its statement, the FOMC changed its description of inflation from "somewhat elevated" to "elevated." This shift in wording was underestimated by the market. In the Fed's linguistic framework, this is not a minor adjustment; it's the Board clearly telling the market that our tolerance for inflation is narrowing.
As chairman, Walsh's task is to build consensus within this council. He faces three voting members who believe even hints of a possible rate cut shouldn't exist—Hammack, Kashkari, and Logan—each more eager than he is to tighten monetary policy. To cut rates, he must first convince these three.
Nobody can tell you how he did it right now.
4. The Hidden Problems of the Neutral Interest Rate
There is another argument that hasn't made it into the mainstream narrative, but it may be the most important background to the whole thing.
The median estimate from the Federal Reserve is that the neutral interest rate (r-star) is around 3.0%. With the current federal funds rate at 3.5%-3.75%, monetary policy is in a "restrictive" range – essentially putting the brakes on the economy, and inflation will gradually decrease.
However, the Cleveland Fed has a model that estimates the neutral interest rate at 3.7%. If this estimate is closer to reality, the current 3.5%-3.75% is not truly restrictive, but at most "neutral to tight," insufficient to sustainably suppress inflation.
In his past research and speeches, Warsh has consistently argued that r-star is higher than the committee's estimate. If he pushes for the Fed to reassess its assumptions about the neutral interest rate after taking office, it means that not only will there be no room for rate cuts, but even the premise that "current policy is already tight enough" will have to be compromised.
The market has not priced this scenario.
5. There is also a political equation.
It took Trump nearly a year to get someone willing to "significantly cut interest rates" into the position of Fed chairman. This event itself has already changed the political landscape of the Fed.
The confirmation vote, 54-45, was the closest in history to a Fed chairman confirmation, more divided than any previous one. During Powell's tenure, Trump subpoenaed his congressional testimony through prosecutors, publicly mocking him as "too late." The renovation of the Fed headquarters was used as a political tool, and the Fed's independence crisis has become one of the most watched topics in 2025.
Walsh's current predicament is this: he was elected to cut interest rates, but the conditions for doing so do not exist; if he insists on not cutting rates, Trump's next move is unpredictable; if he cuts rates under political pressure, inflation will tell the market that the Federal Reserve is no longer independent.
This is not a question with a standard answer.
6. How will the assets be transferred?
Let's look at the bond market first.
Long-term US Treasury bonds have been the most honest scorekeeper in this round of macroeconomic narrative . The 30-year yield has risen from 4.4% at the beginning of the year to 5.19%, and the 10-year yield has reached 4.67%. Ajay Rajadhyaksha of Barclays explicitly stated that 5.5% is not the top, and they are warning that this level will be broken. McCormick, a macro interest rate strategist at Citi, said that 5.5% has become the new "round number target" for traders.
The mechanism driving further increases in long-term yields is not complicated: If Warsh's statement at the June 16 FOMC meeting contains any wording close to "not ruling out further tightening," the 30-year Treasury bond will be repriced to the 5.3%-5.4% range within 30 minutes. At that point, 5.5% will no longer be a prediction, but the next target.
Failure conditions: A substantial breakthrough in the Iran peace talks before the June FOMC meeting, the resumption of air traffic over the Strait of Hormuz, and oil prices falling from $102 to below $80—at which point the May and June CPI data will show significant improvement, and long-term interest rates may have a chance to fall. This judgment needs to be fully revised.
Technology stocks are the second priority. The Nasdaq's forward PE ratio has compressed from its peak of 33 times last year to the 27-times range, but the historical average is around 20-22 times. As long as the 10-year Treasury yield remains above 4.5%, it represents the ceiling for the PE ratio of technology stocks. The first stage of compression was the "disappearance of interest rate cut expectations," and the second stage is the "reignition of interest rate hike expectations"—there is a hurdle between these two stages, and we have just crossed the first one.
Specifically: On the evening following the conference call, funds will first be watching for any hints in Warsh's remarks regarding a timetable for interest rate cuts. If not—in the current baseline scenario—the Nasdaq pullback will likely see a shift towards tech heavyweights within 48 hours. Nvidia, Microsoft, and Apple will be among the first to be affected, followed by secondary tech and growth stocks, but these will be more volatile and harder to predict in terms of direction.
Gold is the most ambiguous commodity within this framework. Theoretically, rising real interest rates are detrimental to gold, but the real interest rate is the nominal interest rate minus inflation expectations—if the market begins to worry about the Fed's independence, inflation expectations themselves will be revised upwards, potentially offsetting the downward pressure on gold from rising interest rates. Coupled with the continued expansion of the US fiscal deficit and the ongoing de-dollarization gold purchases by foreign central banks, gold may experience a situation where "interest rates rise but prices don't fall." This is not a primary prediction, but rather a marginal scenario that needs to be observed.
The US dollar's response is relatively straightforward: renewed expectations of interest rate hikes lead to a stronger dollar. However, this logic becomes less valid if the market perceives the Fed's independence issue as structurally established.
7. The most important thing before June 17th
The progress of the Iranian peace talks is the biggest variable in all of this.
Iranian Foreign Minister Araghchi said last week that the agreement was "a few inches away"—while also saying he had "absolutely no trust in the Americans." Trump called off a planned military strike against Iran on May 19, citing "serious negotiations." However, the Strait of Hormuz remains effectively under control, and the transfer of 40 kilograms of highly enriched uranium remains unresolved.
If negotiations break down before June 16, oil prices will likely return to $110+, and the May CPI will likely exceed expectations again, putting Warsh's first FOMC meeting in the worst-case scenario. If negotiations achieve a breakthrough before then, oil prices will fall, and inflation data will improve, softening the entire logic of "Warsh being cornered."
The former is negative for both the bond market and tech stocks; the latter gives Warsh a temporary respite—but even so, the inherent stickiness of inflation in the service sector will not disappear, at best it will only postpone the problem for a few months .
8. June 17
The most important Fed date of the year is June 17 at 2:30 p.m. – when Walsh takes the stage to deliver his first FOMC statement and then answer questions from reporters.
That day, every word was analyzed repeatedly: whether he used "patient" or "vigilant," whether he mentioned raising interest rates, how he described the persistence of inflation, and how he answered questions like "What was your conversation with Trump like?"
The answer will tell the market how wrong it was in pricing Walsh, and how long it will take to correct that mistake.
