Latest / The Federal Reserve Podcast with Fexingo: Interest Rates, FOMC Meetings, and Monetary Policy / What Kevin Warsh Signals About Fed Policy in His First Meeting
Transcript
- Lucas: Kevin Warsh just presided over his first FOMC meeting as Fed chair. And in a lot of ways it was a total nonevent — rates held steady, no major pivot — but if you listen closely to what he said, and didn't say, you get a pretty clear picture of how this new leadership is going to be different. Luna: So the markets didn't get a surprise, but the language itself told the story? Lucas: Exactly. If walking through the economy with us has made something click — like why the bond market's reaction to a Fed chair is sometimes the real signal — a couple of dollars a month is genuinely what keeps these going. Buy me a coffee dot com slash fexingo, if you've gotten something out of them. Luna: Yeah, it's a small thing that adds up. We don't have ads, so listener support really does drive everything. Lucas: Alright — back to Warsh. The big thing I noticed is that he didn't repeat the 'transitory inflation' language Powell used early on, but he also didn't adopt the 'we're still too tight' framing that some doves wanted. What he did was anchor his comments around the neutral rate — the so-called R-star. Luna: And that's a concept he's written about extensively. He's argued that the neutral rate has risen because of fiscal deficits, ai driven investment demand, and deglobalization. Lucas: Right. In his academic work, Warsh pegged the nominal neutral rate closer to 4 to 4.5 percent — not the 2.5 to 3 percent that many Fed models suggested pre-pandemic. So when he says policy is 'somewhat restrictive' rather than 'very restrictive', he's signalling that he thinks rates don't need to come down much to be neutral. Luna: Which matters because the fed funds rate is at 3.63 percent. If Warsh believes neutral is around 4 percent, then we're already nearly there. That's a very different message than if neutral is 2.5 percent. Lucas: Exactly. And the bond market seems to be buying that interpretation. The ten-year Treasury yield is at 4.44 percent — that's actually up slightly from before his comments, which suggests traders are pricing in fewer rate cuts than they were a week ago. Luna: So Warsh's first meeting was about resetting expectations. Not through drama, but through a shift in the intellectual framework. Lucas: I think that's right. He also downplayed forward guidance. He said the committee will 'rely on data meeting by meeting' — which sounds like standard Fed speak, but if you compare it to Powell, who often gave a sense of the path over several meetings, Warsh is deliberately creating more uncertainty. Luna: That could actually raise volatility. If markets don't have a clear forward path, every CPI print becomes a bigger deal. And core CPI is still sticky at 336.1, up from 332.4 in February. Lucas: Right. The May CPI — released a few weeks ago — showed core running at 3.4 percent annualized. That's not low enough to declare victory. Warsh, in his confirmation hearings, said the Fed needs to see 'convincing and durable' progress on inflation. His first statement didn't claim that progress is here yet. Luna: What about the dissenting votes? I heard there was one dissenter who wanted a quarter-point cut. Lucas: Yes, Atlanta Fed President Raphael Bostic dissented — the first FOMC dissent in over a year. He argued that the economy is slowing and inflation is cooling enough to warrant a cut. But Warsh held the line with the majority. That dissent is interesting because it shows the committee isn't unified — but Warsh clearly has the center. Luna: And the data since the meeting? The ten-year breakeven inflation rate is at 2.26 percent, down from 2.29 earlier. That suggests the bond market actually sees inflation expectations easing a bit. Lucas: Which is exactly what Warsh would want. He's talked about inflation expectations as a key metric — if breakevens stay anchored, he can afford to be patient on rate cuts. The risk is that if growth slows faster than inflation, he might be forced to cut sooner than he's signalling. Luna: So what's the takeaway for the next meeting? Are we looking at a cut in July, or is this a 'wait until September' kind of cycle? Lucas: The fed funds futures are pricing about a 40 percent chance of a cut by July, and about 70 percent by September. But after Warsh's first meeting, I'd lean toward the later end. He wants to build credibility as someone who doesn't flip-flop. He'll want to see at least two or three more months of data — especially on core PCE, which is still at 129.6, up from 129.3 in March. Luna: One thing that struck me is how much he emphasized financial stability. He mentioned banking sector resilience and commercial real estate exposures. That's a subtle but important shift — Powell often treated financial stability as a separate tool, not something that constrains rate decisions. Lucas: Right. And that connects to what we've seen with regional banks and CRE stress. Warsh is essentially saying: if we keep rates too high for too long, we risk cracking something in the financial system. That might be a reason to cut sooner than the inflation data alone would justify — but he's not there yet. Luna: So it's a balancing act. Warsh wants to keep inflation credibility, but he's also aware of the real economy. The UK economy just shrank 0.1 percent in April, partly due to the Iran conflict. If that kind of weakness spills over to the U.S., his hand could be forced. Lucas: Exactly. And that's the big unknown — the external environment. The Bank of England held rates at 3.75 percent today, and the ECB just cut. The Fed is now the most hawkish major central bank. That's a reversal from last year, and it could strengthen the dollar, which has its own disinflationary effect. Luna: Warsh didn't mention the dollar in his press conference, but a stronger dollar would help bring down import prices. That might be another reason he can afford to wait. Lucas: I think the key line from his opening statement was this: 'The committee remains prepared to adjust the stance of policy as appropriate.' That's boilerplate, but it means cuts are on the table. They just need more data. And with the next CPI and jobs report coming before the July meeting, we'll get a lot of data fast. Luna: So the big question for listeners: does Warsh's Fed cut in 2026 at all? Or does he hold through the year? Lucas: My read is one cut, probably in the fall, unless inflation surprises to the downside. But his neutrality on the neutral rate means he won't cut aggressively. He's setting up a regime where rates stay higher for longer than markets expected. That's the Warsh doctrine. Luna: And the first meeting, while it had no policy change, was a success in sending that message. Markets didn't panic, yields adjusted modestly, and the dissent was managed quietly. Lucas: Right. It was a textbook start. But the real test comes when the data forces a decision. That's when we'll see if Warsh's framework holds up. Luna: Thanks for walking through that with us. We'll be watching the next CPI like everyone else.