Latest / The Bear Market Podcast with Fexingo: Surviving Downturns, Buying the Dip, and Long-Term Resilience / How Kevin Warsh Is Remaking the Fed With a Velvet Glove
Transcript
- Lucas: Alan Greenspan died this morning at age 100. That alone could anchor a whole episode — the man who ran the Fed through the 1987 crash, the dot-com boom, 9/11, and the housing bubble. But what caught my attention today is how much the conversation around his legacy is colliding with something Kevin Warsh said just last week. Luna: Warsh — Trump's first Fed chair pick, right? He's been talking about 'regime change in a velvet glove.' That phrase jumped out at me. Lucas: Exactly. Warsh gave a speech at the Economic Club of New York on June 18th — four days before Greenspan's death — and he essentially laid out a blueprint for how the Fed should operate in this cycle. He said the old model of 'data dependency' is dead. Instead, he wants the Fed to be 'prospective' — look at leading indicators, not rearview-mirror data. Luna: That's a huge shift. Greenspan was famous for parsing every decimal of every economic release. Warsh is essentially saying: stop doing that. Lucas: Right. And he's got credibility from 2008. He was the youngest Fed governor in history, appointed at 37, and he was at the table during the TARP and the first quantitative easing. So when he says the old toolkit is insufficient for a world where the neutral rate is lower and fiscal dominance is real, markets listen. Luna: The yield curve today is 27 basis points — 10-year at 4.49, 2-year at 4.20. That's not inverted, but it's flat. In Greenspan's era, a flat curve often preceded a recession. Warsh seems to be saying that's not the signal it used to be. Lucas: He specifically argued that the term premium has been structurally compressed by quantitative easing globally. So a 27-basis-point spread might be the new normal — not a warning sign. But the VIX is at 17.42, up six percent in five days. The VVIX — the volatility of volatility — is at 91.87, up almost five percent. So there's some anxiety underneath the surface. Luna: The VIX at 17 isn't panic territory, but it's not complacency either. If Warsh is right and the Fed stops overreacting to every CPI print, maybe the market can settle down. Lucas: That's the velvet glove part. He's not advocating for a more dovish Fed — he's advocating for a more predictable Fed. He wants the Fed to communicate its reaction function so clearly that markets pre-price the moves. Less drama, less 'Fed speak' that gets parsed by 12 different trading desks. Luna: So it's regime change in style, not necessarily in substance. He still wants the Fed to fight inflation — just do it with a consistent framework. Lucas: Precisely. And it's worth noting that Greenspan, for all his mystique, was actually pretty opaque. He once said, 'If I seem unduly clear to you, you must have misunderstood what I said.' Warsh is the opposite — he wants maximum clarity. Luna: I wonder if that's a reaction to the 2021-2022 fiasco, where the Fed kept saying inflation was transitory and then had to scramble. If Warsh had been chair then, he might have pivoted sooner. Lucas: He hinted at that in his speech. He said 'policy errors of the recent past' could have been avoided if the Fed had been using a broader set of indicators — like money supply growth, which he says was flashing red in early 2021. That's a direct critique of the Powell era. Luna: Speaking of critiques — you mentioned the data dependency point. The real GDP growth just came in at 1.6 percent annualized. That's up from 0.5 percent, but it's still below trend. If Warsh were in charge, would he cut rates into that? Lucas: He wouldn't. He's said repeatedly that the neutral rate is probably higher than the Fed's current estimate — maybe around 3.5 percent in nominal terms. So at 4.49 on the 10-year, we're not restrictive in his view. He'd hold steady and let the economy grow into the higher rate. Luna: That's a very different approach from the market pricing. The fed funds futures are still pricing in a cut by December. Warsh seems to think that's wishful thinking. Lucas: He essentially said that if the Fed cuts prematurely, they risk re-igniting inflation and losing credibility. That's a very 1970s-burn-scar kind of statement. And it ties back to Greenspan — Greenspan's first big test was the 1987 crash, and he cut aggressively to stabilize markets. But then he raised rates just as aggressively to prevent inflation from taking off. Luna: Warsh seems to have absorbed that lesson: act fast in a crisis, but don't get trapped in easy money. Lucas: Exactly. And it's fascinating to watch this play out in real time. The bond market initially sold off after Warsh's speech — the 10-year yield spiked from 4.43 to 4.49 over the next few days. But then it stabilized. The market didn't panic; it just repriced. Luna: That's the velvet glove effect. He didn't shock anyone. He gave a clear roadmap. Lucas: Right. And it makes you wonder: if Greenspan's death marks the end of the 'maestro' era — the era of the all-powerful, slightly inscrutable central banker — then Warsh's emergence might be the start of a new era: the communicator-in-chief. Luna: You know, listening to you lay that out, it's a lot to take in. And honestly, if this conversation helped you make sense of what Kevin Warsh is trying to do, or what Greenspan's legacy means — if it was worth a coffee to you — that's the link. It's buy me a coffee dot com slash fexingo. Lucas: Yeah. It's a small gesture, but it's what keeps this show ad-free and focused on the kind of structural market stories we just covered. So if you're inclined, that's the place. Luna: And we're not going anywhere — we'll keep digging into the policy shifts and market signals. Speaking of which, one thing I want to circle back to: Warsh talked about the 'precautionary principle' in monetary policy. That seems like a direct counter to Greenspan's 'irrational exuberance' approach. Lucas: Yes. Greenspan famously refused to pop the tech bubble because he didn't think the Fed should target asset prices. Warsh seems to think the Fed should at least lean against financial imbalances — not aggressively, but with a 'macroprudential' toolkit. He mentioned using margin requirements and countercyclical capital buffers more actively. Luna: So the velvet glove includes a few brass knuckles underneath. He's not afraid to use regulation to cool markets. Lucas: Exactly. And that's a huge shift from the Greenspan doctrine. Greenspan believed markets were self-correcting. Warsh has seen markets break — 2008, 2020, the 2022 bond market turmoil — and he's more skeptical. Luna: I think the real test will be the first time the Fed has to make a decision under Warsh's framework in a genuine crisis. We haven't had that yet. The Strait of Hormuz peace talks are going on, but that's a geopolitical risk, not a financial one. Lucas: True. And the market is oddly calm about that. The S&P is at 7,478 — down one percent in five days, but nothing like a panic. The Dow is actually up slightly. So maybe the velvet glove approach is already working — the market trusts that the Fed won't overreact. Luna: Or maybe it's just complacency. The VIX at 17.42 isn't screaming fear. But the VVIX at 91.87 is above its historical median of around 85. That says some options traders are hedging for a big move, even if the headline index is quiet. Lucas: That's the kind of nuance Warsh would appreciate. The surface looks calm, but beneath it, there's more uncertainty. And his whole framework is about reading those beneath the surface signals. Luna: Let's tie it to something concrete. If I'm a bond investor, how do I position for a Warsh Fed? Lucas: He's said he wants to 'normalize the yield curve' — meaning he'd prefer a steeper curve with a higher term premium. So if you believe him, you'd want to be short duration, long the front end. That's a steepener trade. Luna: But the 10-year is at 4.49, the 2-year at 4.20. It's already steepening. The spread widened from 27 to 29 basis points last week before settling back. So maybe the market is already pricing in a Warsh-style normalization. Lucas: Partially. But I think the biggest impact will be on the inflation breakevens. If Warsh succeeds in making the Fed more predictable, inflation expectations become more anchored. That means less volatility in TIPS and nominal spreads. Luna: So a lower-volatility bond market overall. That's a big change from the past few years. Lucas: It would be. And ironically, it's a return to something Greenspan achieved in the 1990s: a stable, predictable monetary policy that lets the private sector plan. Warsh wants the Fed to be boring again. Luna: Boring, but effective. That might be the real legacy of the velvet glove. Lucas: We'll see if he gets the chance to implement it. He's not the chair yet — Jerome Powell's term runs until May 2028. But Warsh's influence is already being felt in every FOMC statement. Luna: And Greenspan's passing gives us a natural moment to reflect on how far central banking has come. From opaque maestro to transparent communicator — that's a 40-year arc. Lucas: It is. And the next chapter is being written right now, in real time, with the velvet glove.