Trump elected Warsh to cut interest rates. But on May 15th, 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 a "hint at a possible rate cut." Those three dissenting votes—Hammack of Cleveland, Kashkari of Minneapolis, and Logan of Dallas—cast the most unusual dissent since October 1992 at the end of April. It wasn't against cutting rates, but against the "soft tone." They believed that in the current inflationary environment, there shouldn't even be a hint of a rate cut. Warsh inherited a central bank on the verge of tearing apart from within. A Person Misunderstood by the Market The mainstream market characterization of Warsh comes from two unreliable sources. First: Trump elected him because he wanted to cut interest rates. The logic is—if he's elected, he'll 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 Warsh over the past fifteen years. In November 2010, the Fed 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 while writing against is extremely rare in Fed history, later termed "silent dissent" by researchers—not genuine agreement, but simply a reluctance to disrupt 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 delivered 13 speeches specifically mentioning "upside risks to inflation." While other board members were still discussing how to support employment, he was already worried about an enemy that hadn't yet appeared. Now that enemy is at the door. April CPI reached 3.8%, a three-year high. The energy shock from the Iran war caused gasoline prices to rise by 28.4% year-on-year, and fuel oil by 54.3%. In Warsh's first week in office, the 30-year Treasury yield just touched 5.19%, only a step away from the 2007 high. Inflation is not just an Iranian problem. A core tenet of the dovish argument is that the Iranian oil shock is an exogenous event. Once the Hormuz negotiations progress, oil prices will fall from $100+ to $75-80, energy inflation will quickly subside, CPI figures will naturally improve, and Walsh will have a window for interest rate cuts. This logic holds true. However, one line in the April inflation data makes it less clean. Services inflation jumped to +0.5% month-on-month in April. In March, this figure was +0.2%. Gasoline doesn't account for much of the services inflation. The price increases in food, healthcare, transportation, and entertainment—these are not directly related to the Hormuz. Housing, however, contributed more than double, rising 0.6% month-on-month. 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. At that time, Powell said inflation was temporary, but by the time he realized that service sector stickiness had already formed, he could only use the most aggressive interest rate hike cycle to remedy the situation. Warsh has historically been more aware of inflation than the market—this time, he is unlikely to make the same mistake again. There is another thing the market hasn't fully priced in: the Fed Warsh took over was internally divided to an unusual degree. The April 28-29 meeting maintained interest rates unchanged, ostensibly a 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. In the FOMC statement, the Committee 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 explicitly telling the market that its tolerance for inflation is shrinking. As Chairman, Warsh's role is to build consensus within this Board. He faced three voting members who believed even hints of a possible rate cut shouldn't have appeared—Hammack, Kashkari, and Logan—each more eager than he was to tighten monetary policy. To cut rates, he had to convince these three first.
Right now, no one can tell you how he did it.
The Hidden Problem of the Neutral Interest Rate
There's another debate that hasn't entered the mainstream narrative, but it's perhaps the most important background to the whole thing.
The median estimate from the Fed committee is that the neutral interest rate (r-star) is around 3.0%. The current federal funds rate is between 3.5% and 3.75%, so from this perspective, monetary policy is in a "restrictive" range—applying the brakes to the economy, and inflation will gradually decrease.
But 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, at most "neutral to tight," insufficient to sustainably suppress inflation. Warsh has consistently argued in his past research and speeches that the r-star is higher than the committee's estimate. If he pushes for the Fed to reassess the assumption of a neutral interest rate after taking office, it means not only is there no room for rate cuts, but even the premise that "current policy is already tight enough" will be compromised. The market has not priced in this scenario. There is also a political equation: Trump spent nearly a year putting someone willing to "significantly cut rates" into the Fed chairmanship. This event itself has already changed the Fed's political landscape. The confirmation vote of 54-45 was the closest in history to a Fed chairman confirmation, more divided than any previous election. During Powell's tenure, Trump subpoenaed his congressional testimony through prosecutors, a move publicly mocked as "too late." The renovation of the Fed headquarters was used as a political tool, and the Fed's independence crisis became one of the most watched topics in 2025. Powell's current predicament is: he was elected to cut interest rates, but the conditions for such a cut don't 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. Where will assets go? Let's look at the bond market first. Long-term US Treasury bonds have always been the most honest scorekeeper in this round of macroeconomic narratives. The 30-year Treasury yield rose from 4.4% at the beginning of the year to 5.19%, while the 10-year yield reached 4.67%. Ajay Rajadhyaksha of Barclays explicitly stated that 5.5% is not the peak, and they are warning that this level will be breached. 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 on June 16th contains any wording close to "not ruling out further tightening," the 30-year Treasury yield will be repriced to the 5.3%-5.4% range within 30 minutes. At that point, 5.5% will not be a prediction, but the next target. The failure condition is: a substantial breakthrough in the Iran peace talks before the June FOMC meeting, the resumption of navigation in 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 decline. 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 is 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 night after the conference call, funds will first watch for any hints in Warsh's remarks about a timetable for interest rate cuts. If not—in the current baseline scenario—the Nasdaq pullback will likely enter the tech-heavy stocks within 48 hours. Nvidia, Microsoft, and Apple will be the first to be affected, followed by secondary tech and growth stocks, but these will be more volatile and harder to predict. Gold is the most ambiguous stock in this context. Theoretically, rising real interest rates are bad for gold, but real interest rates are nominal interest rates minus inflation expectations—if the market starts to worry about Fed 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 the primary judgment, but a marginal scenario that needs to be observed. The US dollar is relatively straightforward: renewed expectations of interest rate hikes → a stronger dollar. However, this logic will be less valid if the market perceives the Fed's independence issue as structural. The most important thing before June 17th: Progress in the Iran 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 19th, citing "serious negotiations." But Hormuz remains effectively under control, and the transfer of 40 kilograms of highly enriched uranium remains unresolved. If negotiations break down before June 16th, oil prices will likely return to $110+, and the May CPI will likely exceed expectations again, meaning Warsh's first FOMC meeting will face the worst-case scenario. If a breakthrough is achieved in negotiations before then, oil prices fall, and inflation data improves, the entire logic of "Wash being cornered" will soften. The former is negative for 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 won't disappear; at best, it will postpone the problem for a few months. June 17th is the most important Fed date this year—2:30 PM on June 17th—when Warsh takes the stage to deliver his first FOMC statement and answer reporters' questions. On that day, every word will be analyzed repeatedly: will he use "patient" or "vigilant," will he mention interest rate hikes, how will he describe the persistence of inflation, and how will he answer 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.
Alex
Weatherly
Anais