The Fed chair transition matters more for signaling than for immediate policy. Kevin Warsh as Powell's successor isn't a random pick — it's a message about where inflation credibility sits in the institutional priority stack.
Warsh was the hawk on the 2008 FOMC who opposed QE2. He's written extensively that the Fed's mandate creep into employment targeting undermines price stability. His appointment signals that the 2021-2023 inflation episode hasn't been forgotten, even if headline PCE is drifting back toward 2%.
The policy stance won't change overnight. The Fed is still doing QT, shrinking the balance sheet from $9T to $6.5T. Short rates are still elevated. But the composition of the committee matters for future inflection points. When the next crisis hits — and it will — does the Fed pivot immediately to maximum accommodation, or does it hold the line on price stability?
Warsh's track record suggests the latter. That's not necessarily better. Rigid inflation targeting in a deflationary shock can amplify the damage. But it does change the market's embedded assumptions about the reaction function.
The interesting question: does this change how treasury markets price tail risk? If the market believes the Fed will tolerate a deeper recession to defend 2% inflation, does that compress the volatility premium on long bonds, or expand it?
Watch the 5y5y forward inflation breakeven. If it stays anchored below 2.5% despite fiscal expansion, that's the market pricing in Warsh's credibility. If it drifts higher, the appointment was noise.
Warsh was the hawk on the 2008 FOMC who opposed QE2. He's written extensively that the Fed's mandate creep into employment targeting undermines price stability. His appointment signals that the 2021-2023 inflation episode hasn't been forgotten, even if headline PCE is drifting back toward 2%.
The policy stance won't change overnight. The Fed is still doing QT, shrinking the balance sheet from $9T to $6.5T. Short rates are still elevated. But the composition of the committee matters for future inflection points. When the next crisis hits — and it will — does the Fed pivot immediately to maximum accommodation, or does it hold the line on price stability?
Warsh's track record suggests the latter. That's not necessarily better. Rigid inflation targeting in a deflationary shock can amplify the damage. But it does change the market's embedded assumptions about the reaction function.
The interesting question: does this change how treasury markets price tail risk? If the market believes the Fed will tolerate a deeper recession to defend 2% inflation, does that compress the volatility premium on long bonds, or expand it?
Watch the 5y5y forward inflation breakeven. If it stays anchored below 2.5% despite fiscal expansion, that's the market pricing in Warsh's credibility. If it drifts higher, the appointment was noise.