Perhaps Warsh had no choice but to sound hawkish at his first meeting
The power of faith
highlights
Peak hawkish?
Current Views
Flat
The dollar
Warsh has come in at an awkward moment as he is keen to re-establish some of the Fed’s lost credibility under Powell but starts his new job as the recent inflation surge glides into the rearview mirror. So, he is amping up the hawkishness when it may prove unnecessary. Oil is not the only inflationary force out there, of course, but it’s the dominant one and its impact on the price level will dissipate.
This means that Core PCE (Thursday) will be another backward-looking release with little meaning and I would fade it either way. Each time we get a new policy shock, or the shock ends, we have to wait a few months for the data to catch up. In the meantime, the safest assumption has always been that the soft landing that started in 2023 continues, and inflation is sticky but not out of control.
While I don’t like to be a reflexive contrarian, because that’s not a good way to make money, my first instinct here is to note that we are now staring at the mirror image of what everyone thought the new Fed was going to look like. We have gone from Hassett or whoever will cut rates three times to Warsh will hike twice. Yes, the macroeconomic backdrop changed, but has it changed THAT much? Not really.
Recall for a long time the market believed that President Trump has sway over interest rate policy. But he really doesn’t. I feel like Warsh will be another orthodox Chair—a billionaire Fed lifer who will probably look very much like most other Fed chairs when all is said and done. Some communication nuances will change, and there will be task forces and other cosmetic adjustments, but I don’t believe those saying that this is some kind of huge regime change or new sheriff in town.
As inflation drops, Warsh will get less hawkish and we will see that he’s just following the market and the data like every other Fed chair. I strongly believe that some of Warsh’s opening hawkish vibe is necessarily performative. There’s a reasonable game theoretic reason you don’t come in on day one, with inflation rising and above target for five years, and sound dovish. But as Matt Gittins has pointed out: They have moved from forward-looking policy to real-time, current-data-driven policy right at peak divergence between the two.
So today we have a ripping USD and hikes priced and a hawkish Fed responding to an oil crisis that started in March and peaked in April and is mostly over. As the June and July data show lower prices, we could easily look back on mid-June as peak USD and peak hawkish Fed. “He had to be hawkish at that meeting”, we will say. I think there is a pretty decent chance that the June 2026 meeting will be one of the most, if not the most hawkish Fed meeting you will see under Warsh. The central banks all move together, and the ECB is already backing off:
*LAGARDE SEES NO NEED FOR MORE FORCEFUL ECB RESPONSE TO IRAN WAR
I do not necessarily feel that right here, right now, is the time to buy bonds or sell USD, but if I was forced to have a position, those would be the ones. For now, I will be looking for places to buy EURUSD, sell USDCAD, and/or sell USDJPY or buy 10-year or 30-year bonds. Maybe corporate month end USD buying will provide a peak moment to sell dollars. In a low-vol environment where the macro backdrop is becoming less inflationary, chasing the USD higher here feels like a bad idea to me. There is no CFTC data yet because of Juneteenth, so tomorrow we will publish the positioning report and get a sense of whether USD positioning is large enough to signal an imminent reversal. If it does, I will probably go short USD.
Calendar
As mentioned, Core PCE is supposedly exciting, but not actually exciting. It’s backward looking and prices are going to be lower in June and July. It feels to me like the market has simply moved on from Iran and no war headlines will move the needle anymore.
Final Thoughts
1. This essay by Adam Butler is one of the best things I have read in a long time. It’s long, so take some time on a quiet afternoon to fully drink it in.
https://www.panoptica.com/the-neuro-metaphysics-of-ruin/
It speaks to what happens when everything becomes a metric and we mistake the map for the territory. Goodhart’s Law run amok with potentially catastrophic implications.
2. The MOF has a bit of an issue as they can’t fight a hawkish Fed and rising bond yields. But surely, they also cannot tolerate USDJPY above 162.50?
3. The divergence between the USD, gold, bitcoin, and stocks is interesting.
Have a galactic day.
The power of faith
