Let’s Talk About Kevin Warsh

Dear Reader,

This is Dylan Jovine with Behind the Markets.

Happy Friday. TGIF.

First, I want to thank everyone who showed up for our webinar yesterday.

On behalf of all of us, we're immensely grateful for the opportunity to share our research with you.

I woke up this morning just feeling thankful that I get to do this job — that you watch these videos, subscribe to our products, or just follow along even if you don't.

Every single day, we don't forget who we're working for. That's you. The day we forget that is the day I might as well stop doing this.

If you missed yesterday’s webinar, please check it out now before we take it down.

Anyway, let's talk about Kevin Warsh.

A New Fed

Wednesday was Warsh's first press conference as Fed Chairman, and my headline is simple: I'm happy.

It feels like we're going back to an Alan Greenspan Federal Reserve. Minimalist. Focused on price stability above all else. No five hundred other somewhat political objectives. Just the job.

I'll give Jerome Powell enormous credit for how he handled COVID. He took a bazooka to that problem, and it could have been a lot worse. The first time in American history we basically shut the entire economy down — fifteen days to flatten the curve — and then had to put the train back on the tracks. That had never been done before. Powell handled it.

But I'm glad Warsh is making price stability job number one.

Frankly, I don't even understand why we have a 2% inflation target at all. We're basically all agreeing to erode the value of our currency by 2% every year. I've never understood why that's even a thing.

Why He Had to Come Out Hawkish

A lot of people came into this year expecting two to four rate cuts. A lot of people assumed Trump's pick would walk in and immediately lower rates. That was never going to happen.

Here's why. If a new Fed Chairman just does whatever the President wants, the bond market will see right through it. You lose your credibility on day one. The markets ignore you. So almost by necessity, you have to come out tough — just to prove you're nobody's tool.

Think about Arthur Burns. Brilliant, independent economist. Then Nixon got to him and beat him into submission. Burns became a mouthpiece, and we never fully escaped the inflation spikes of the seventies — they'd go up, come back down, then spike again — until Volcker stepped in and said enough. He gave the country the painful medicine it needed because nobody else had the political will to do it.

Warsh understands this. You can't be anyone's tool. Not the President's. Not Wall Street's. You've got to call it like you see it from the start.

Will He Raise Rates?

That's the real question on Wall Street right now.

My instinct leans hawkish. But energy prices have been coming down — partly due to the situation with Iran — and energy has been a big driver of inflation. That takes some pressure off. And I can't imagine any Fed Chairman raising rates heading into midterm elections. Both parties would scream that the game is being rigged. So the window for a hike is narrower than the hawks think.

The Balance Sheet Is the Real Story

The thing I'm most interested in watching is what Warsh does with the Fed's balance sheet.

Bill Clinton was the last President to not only balance the budget but run a surplus. Since then, it's been spending like mad. Congress keeps passing bills it can't fund, and the burden falls on the Fed to keep rates low enough for people to actually buy all that debt. Over time, the Fed became one of the biggest buyers in the bond market — which distorts rates, distorts markets, and distorts everything.

A lot of serious global macro investors I know will tell you quietly that this hasn't been a real market since 2008. The Fed is too big a player.

If Warsh starts selling bonds and lightening that balance sheet, rates will drift higher. There simply isn't enough buying power in the market to absorb all that debt without the Fed in the room.

There are also whispers that Warsh and Treasury Secretary Bessent are looking at moving part of the Fed's balance sheet over to the Treasury. That would be a very big deal. Worth watching closely.

The Bottom Line

My concern — and why I take such a hard line on this — is simple. Debt reduces your freedom to act. There will be another COVID. There will be another financial crisis. There will be another war. And if you're already choking on debt when it happens, history tells us what comes next. You don't have to go back very far.

Weimar Germany showed us exactly what an uncontrolled inflation spiral looks like when a government has no room left to maneuver.

This is the window to get it right.

Warsh played the part exactly as you'd want him to play it. He came out tough, independent, focused. I'm encouraged. Let's see if he has the political will to follow through.

Have a wonderful weekend. I'll see you Monday.

“The Buck Stops Here,”