US Viewpoint: Kevin Warsh primer

Research evidence excerpt

US Viewpoint: Kevin Warsh primer

Is Warsh a hawk or a dove?

Warsh was a staunch inflation hawk in his first term as a Fed Governor (2006-11). Even

when the economy was weak following the financial crisis, he was concerned that easy

Fed policy (particularly Quantitative Easing- QE) would cause an inflation problem down

the line. That said, it’s worth noting that Warsh never dissented in an FOMC vote.

Recently, however, Warsh has taken a dovish stance. Before his nomination for Fed

Chair, he called for immediate interest rate cuts, arguing that the Fed is over-reacting to

its error on inflation in 2021-22 by keeping policy rates elevated. At the nomination

hearing, Warsh said the Fed should look through one-off changes in price levels due to

tariffs and geopolitics. He said the Fed should focus on measures of “underlying

inflation” and expressed a preference for median and trimmed-mean inflation over the

traditional core.

The inflation picture has deteriorated significantly

The challenge for Warsh will be that the narrative on inflation has changed substantially

since his nomination. Headline PCE is moving toward 4% because of the energy price

shock from the Iran conflict. Perhaps more importantly, core inflation has taken a big leg

up, with much of the impact of the conflict still in the pipeline and housing disinflation

now progressing much more slowly.

We expect core PCE to print at 3.3% y/y in April, with an annualized pace of more than

4% in the last five months. In response to the spike in inflation and resilient labor data,

the 2y yield has jumped by over 60bp on net since the time of Warsh’s nomination

(Exhibit 1). End-’27 Fed pricing has shifted from over two cuts to about one hike.

Importantly, the tone of Fedspeak has also shifted markedly.