Source: Wall Street News
Trump chose Warsh to cut rates. But on May 15th, when Warsh formally took the chair left by Jerome Powell, what he inherited was not a Fed ready to cut rates at any moment, but an FOMC where three governors disagreed even with "hinting that the next move might be a rate cut".
Those three dissenting votes—Cleveland's Hammack, Minneapolis's Kashkari, Dallas's Logan—cast the most unusual dissent since October 1992 at the late-April meeting. Not against cutting rates, but against the "tone being too soft." They believed that in the current inflation environment, not even a hint of rate cuts should be given.
What Warsh took over was a central bank on the verge of tearing itself apart from within.
1. A Man Misread by the Market
The market's mainstream characterization of Warsh comes from two rather unreliable sources.
The first: Trump chose him precisely because he wanted rate cuts. The logic is—if you pick him, he'll cut. The second: During his confirmation hearing, Warsh showed some agreement with the notion that "the Iran oil shock is transitory," which was interpreted as a dovish signal.
Both of these inferences skip over the most authentic side of Warsh from the past fifteen years.
In November 2010, the Fed was debating QE2—the question of whether to purchase another $600 billion in Treasury securities. Warsh voted in favor that day. The same week, he published an article in *The Wall Street Journal* criticizing QE2. Voting support while writing opposition is extremely rare in Fed history, later dubbed a "silent dissent" by researchers—not truly agreeing, just not wanting to break consensus.
Back then, core PCE never exceeded 2.5%, and unemployment was as high as 10%. There was no obvious inflation pressure, yet between 2006 and 2011, Warsh gave 13 speeches specifically mentioning "upside risks to inflation." While other governors were still discussing how to support employment, he was already worrying about an enemy that hadn't yet appeared.
Now that enemy is at the door. April CPI at 3.8% is a three-year high. The energy shock from the Iran war pushed gasoline prices up 28.4% year-on-year, and fuel oil up 54.3%. In Warsh's first week, the 30-year Treasury yield just touched 5.19%, only a step away from its 2007 peak.
2. Inflation Isn't Just an Iran Problem
There is a reasonable kernel in the dovish argument: the Iran oil shock is an exogenous event. Once there is progress in Hormuz negotiations and oil prices retreat from $100+ to $75-80, energy inflation will fade quickly, CPI numbers will naturally improve, and Warsh will get a window for rate cuts.
This logic holds. But there's a line of data in April's inflation figures that makes it less clean.
Services inflation jumped to a month-on-month +0.5% in April. In March, this number was +0.2%.
Services inflation doesn't contain much gasoline. Dining, healthcare, transportation services, entertainment—the rise in these prices isn't directly related to Hormuz. The housing component was +0.6% month-on-month in the same period, doubling its contribution. Core CPI, which excludes food and energy, was +0.4% month-on-month in April, the fastest monthly increase since late 2025.
In other words, inflation is spreading from the energy side to the services side. Once this process starts, even if oil prices fall back to $80 tomorrow, service-side price pressures won't disappear in two or three months.
This is precisely the old path the Fed misjudged as "transitory" in 2022. Back then, Powell said inflation was transitory. By the time he realized services-sector stickiness had formed, he could only use the most aggressive hiking cycle to catch up. Warsh has historically awakened earlier than the market on inflation issues—this time, he's unlikely to make the same mistake again.
3. The FOMC He Inherited
Another thing the market hasn't fully priced in: the Fed Warsh inherited is already split to an unusual degree.
The April 28-29 meeting, which kept rates unchanged, had an 8-4 vote result on the surface. An 8-4 split itself is abnormal—the last time there were four dissents was October 1992. But what's more subtle is the direction of these four votes: three opposed hinting at rate cuts, one supported a rate cut. There were dissents in both directions simultaneously within the Board.
In the FOMC statement, the Committee changed its description of inflation from "somewhat elevated" to "elevated." This upgrade in wording has been underestimated by the market. In the Fed's linguistic system, this isn't a minor tweak; it's the Board clearly telling the market: our tolerance for inflation is shrinking.
As Chairman, Warsh must build consensus within this Board. He faces three voting members—Hammack, Kashkari, Logan—each more eager to tighten than he is, who believe not even a hint of "the next move could be a cut" should be given. To cut rates, he must first persuade these three.
Right now, no one can tell you how he does that.
4. The Hidden Problem with the Neutral Rate
There's another debate that hasn't entered the mainstream narrative, but it might be the most important backdrop to the whole thing.
The median estimate of the Fed's Board is that the neutral rate (r-star) is around 3.0%. The current federal funds rate is at 3.5%-3.75%, so from this perspective, monetary policy is in a "restrictive" range—it's putting the brakes on the economy, and inflation will slowly come down.
But the Cleveland Fed has a model that estimates the neutral rate at 3.7%. If this estimate is closer to reality, the current 3.5%-3.75% isn't truly restrictive, at best "neutral-tight," insufficient to sustainably suppress inflation.
In his past research and speeches, Warsh has consistently leaned towards believing r-star is higher than the Board's estimate. If, after taking office, he pushes the Fed to reassess its neutral rate assumptions, it would mean not only is there no room for rate cuts, but even the premise that "current policy is already tight enough" would be in question.
The market hasn't priced in this scenario.
5. There's Also a Political Equation
It took Trump nearly a year to put a man willing to "cut rates significantly" into the Fed Chairman's seat. This act itself has already changed the Fed's political landscape.
The confirmation vote was 54-45, the closest in history for a Fed Chairman, more divided than any previous term. During Powell's tenure, Trump had congressional testimony records subpoenaed by prosecutors and publicly mocked him as "too late." The Fed headquarters' renovation was used as a political tool; a Fed independence crisis became one of the most watched themes of 2025.
Warsh's current predicament is: he was chosen to cut rates, but the conditions for cutting don't exist; if he insists on not cutting, Trump's next reaction is unpredictable; if he cuts under political pressure, inflation will tell the market the Federal Reserve is no longer independent.
This isn't a problem with a standard answer.
6. How Assets Move
Look at the bond market first.
Long-end US Treasuries have been the most honest scorekeeper of this macro narrative. The 30-year went from 4.4% at the start of the year all the way to 5.19%, the 10-year to 4.67%. Barclays' Ajay Rajadhyaksha explicitly said: 5.5% isn't the top; they're warning this level could be breached. Citi's macro rates strategist McCormick says 5.5% has become the new "round number target" for traders.
The mechanism pushing the long end higher isn't complicated: at the June 16th FOMC, if Warsh's statement contains any wording approaching "does not rule out further tightening," the 30-year Treasury will be repriced to the 5.3%-5.4% range within 30 minutes that day. At that point, 5.5% wouldn't be a forecast; it would be the next stop.
Failure condition: If Iran peace talks show substantive progress before the June FOMC, Hormuz navigation resumes, and oil prices fall back below $80 from $102—then May and June CPI data will show clear improvement, long-end rates have a chance to retreat, and this judgment needs a full revision.
Tech stocks are the second in line. The Nasdaq's forward P/E has already compressed from last year's peak of 33x to the 27x range, but the historical average is around 20-22x. As long as the 10-year Treasury stays above 4.5%, it's a ceiling for tech stock P/E multiples. The first stage of compression was "disappearing rate cut expectations"; the second stage of compression is "rekindled rate hike expectations"—there's a hurdle between these two stages, and we've just crossed the first one.
Specifically: right after the press conference ends that evening, funds will first look for any hint of a rate cut timetable in Warsh's wording. If there isn't one—the current base case—the Nasdaq's correction will enter mega-cap tech stocks within 48 hours. Nvidia, Microsoft, Apple are the first affected; secondary tech and growth stocks follow behind, but are more volatile and harder to predict directionally.
Gold reads the most ambiguously in this framework. Theoretically, rising real rates are negative for gold, but real rates are nominal rates minus inflation expectations—if the market starts worrying about Fed independence, inflation expectations themselves could be revised up, potentially offsetting the pressure from rising rates on gold. Add in the continuing expansion of the US fiscal deficit and foreign central banks' continued gold-buying behavior for de-dollarization, gold could experience a scenario of "rates rise but prices don't fall." This isn't the main call, but an edge case to watch.
The dollar is relatively straightforward: rekindled rate hike expectations → a stronger dollar. But if the market determines Fed independence issues have become structural, this logic will be discounted.
7. The Most Important Thing Before June 17th
Progress in Iran peace talks is the biggest variable in all of this.
Iranian Foreign Minister Araghchi said last week that the agreement was "inches away"—while also saying he "completely distrusts the Americans." Trump halted a planned military strike against Iran on May 19th, citing "serious negotiations underway." But the Strait of Hormuz is still effectively under control, and the issue of transferring 40kg of highly enriched uranium remains unresolved.
If talks break down before June 16th, oil prices return to $110+, May CPI is highly likely to exceed expectations again, and Warsh's first FOMC opening faces the worst possible scenario. If talks achieve a breakthrough before then, oil prices retreat, and inflation data shows improvement, the whole "Warsh being backed into a corner" logic softens.
The former is negative for both bonds and tech stocks; the latter gives Warsh a temporary breathing space—but even so, the endogenous stickiness of services inflation won't disappear, at best pushing the problem back a few months.
8. June 17th
The most important Fed calendar entry this year is 2:30 PM on June 17th—when Warsh takes the stage to release his first chaired FOMC statement, then answers reporters' questions.
That day, every word will be analyzed repeatedly: whether he uses "patient" or "vigilant," whether he mentions rate hikes, how he describes the persistence of inflation, how he answers questions like "What are your conversations with Trump like?".
The answers will tell the market how much it mispriced Warsh, and how long it will take to correct that mistake.
