On Kevin Warsh, Inflation, and the Markets
July 3, 2026
Thoughts on the Market, by Andy Krieger
Kevin Warsh's first press conference as Federal Reserve Chair, held June 17, 2026, was unambiguously interpreted by markets as hawkish, despite his having campaigned for the job on a dovish, rate-cutting platform. The FOMC held rates at 3.50 to 3.75 percent for a fourth straight meeting, but the Summary of Economic Projections shifted materially: nine of eighteen participants now see at least one hike in 2026, and the median year-end PCE inflation projection jumped to 3.6 percent from 2.7 percent in March. Warsh repeated the phrase “price stability” roughly a dozen times and declined to push back when reporters raised the prospect of a hike.
Aside from talking tough about inflation, Warsh announced he would be forming five task forces to address various aspects of the Fed's job. It isn't clear how long these task forces will take to report back, but it is safe to assume we are talking months, not weeks. Whether he truly believes these task forces are essential right now is unclear, but one obvious benefit of their formation is that it gives Warsh cover to delay tough decisions for a while.
Warsh was also clear that he wants to reverse the Fed's fifteen-year drift toward ever more transparency and forward guidance. A few concrete pieces of that shift:
What he actually did at the meeting
• The post-meeting statement was shorter than under Powell, stripped down to close with just “The Committee will deliver price stability.”
• He said he and his colleagues decided at this meeting not to give forward guidance, or any hint of where interest rates may be heading.
• He personally declined to submit a dot-plot projection, even while encouraging his colleagues to continue doing so, saying he had “refrained from offering any projections of my own consistent with my long-held views on the SEP, at least as currently structured.”
• One of his five new task forces is dedicated specifically to reviewing how the Fed communicates going forward.
The reason he gave, in his own words
Warsh's core argument is that heavy forward guidance has started to corrupt the very market signal the Fed relies on to make policy. “Financial market prices are probably the most important source of information to guide central bankers,” Warsh said at the press conference, “but when all the financial markets are doing is reflecting back what we've said, then we're taking the most important source of information and we're being blind to it.” In other words: if the Fed tells markets what it plans to do, markets price that in; the Fed then looks at market prices and sees only an echo of its own guidance rather than independent information about the real economy. Warsh wants markets reacting to actual data, not to Fed rhetoric about future data.
The repercussions of this seemingly innocent policy shift are far-reaching. Heavier reliance on raw financial data could bring more short-term and medium-term volatility, but removing the echo-chamber effect may also help markets avoid the kind of catastrophic long-term damage that occurs when speculators build up excessive one-way bets that ultimately blow up in a violent meltdown. Put simply: less guidance likely means choppier markets day to day, but potentially fewer of the crowded, guidance-fueled positions that cause the truly violent unwinds.
The irony here is that many people believe forward guidance has been a wonderful strategy, one that helped fuel the stock market's greatest bull run in history. My own view is more cynical. Having traded large positions through the Great Financial Crisis, the dot-com bubble, the Long-Term Capital debacle, the Nikkei crash of 1990, and the 1987 crash, my concern is that we may be facing, in the not-too-distant future, a market sell-off that matches or exceeds the violence of those historic meltdowns. Markets today have become so reliant on massive U.S. fiscal support and an ever-present Fed put that we are likely pushing the limits of the greatest bubble in a generation across multiple markets. The tools of the Treasury and the Fed could be severely tested, and at times overwhelmed, if the coming correction arrives as a vicious sell-off rather than a choppy, sloppy, extended soft landing.
Right now, multiple markets are priced to perfection, but the fundamentals are hardly perfect. I have written at length about valuation measures that all point to the same conclusion: today's stock market is among the most overvalued in U.S. history. I am not suggesting a crash is imminent. I am suggesting it is time to be cautious and take protective steps to lock in some profits and reduce exposure. There are hedging strategies that are shockingly cost-efficient; I won't delve into them here, but if you would like to stay long while adding downside protection, reach out and my team and I can walk through your situation.
The list below is not exhaustive, and not all of it is my own thinking; it draws together the evidence a range of banks, strategists, and investors are currently pointing to. But taken together, it is the kind of setup that has historically preceded the sharpest corrections.
1. AI valuation and concentration risk. The “Magnificent Seven” now make up roughly a third of the S&P 500's market cap, matching dot-com-era concentration in the top names. Expected long-term S&P 500 earnings growth recently hit 20.2 percent, above 2000's peak of 18.6 percent, per Acadian's Owen Lamont. Apollo's Torsten Sløk calls this the “diversification illusion”: indexing into the S&P 500 no longer means diversifying away from AI-single-theme risk. This is also where the Buffett Indicator belongs. The ratio of total U.S. stock market value to GDP is now around 230 percent, an all-time high and roughly two standard deviations above its long-run trend. That level has only been reached three other times in sixty years, and every prior instance was followed by a decline of at least 25 percent. It is not a short-term timing tool, and I am not using it as one, but I have never seen it this stretched, and that alone warrants a careful approach.
2. AI capital spending is shifting from cash flow to debt. Hyperscaler capex for 2026 has been revised up repeatedly, from $650 billion to $725 to $785 billion per Moody's, and a growing share is debt-financed rather than funded from free cash flow. Oliver Wyman estimates roughly half of $6 trillion in AI capex through 2030 could be debt-financed, a credit buildup exceeding all broadband infrastructure investment since the internet began. A slowdown in AI revenue growth relative to that debt load is the kind of trigger that turns an equity correction into a credit event.
3. Circular, closed-loop AI financing. Nvidia invests in and guarantees debt for companies, such as Core Weave, that buy its own chips. Microsoft owns roughly 27 percent of OpenAI and is also one of Nvidia's largest customers, accounting for close to a fifth of Nvidia's total revenue through chip purchases for its cloud and AI buildout. Microsoft therefore sits on multiple sides of the AI financing structure at once: OpenAI investor, OpenAI infrastructure provider, and major Nvidia customer, while Nvidia is simultaneously financing other buyers of its own chips. The concern isn't that any one relationship is unusual; it's that a small set of companies are financing, supplying, and buying from each other in overlapping ways, which makes it hard to tell how much reported revenue and valuation growth reflects real, independent demand versus capital circulating among a tight group of counterparties.
4. A genuinely hawkish, credibility-seeking Fed. Warsh has explicitly deprioritized forward guidance and stressed price stability over growth support, and Bank of America, Deutsche Bank, and market pricing have all leaned toward actual hikes rather than cuts since the June meeting. A Fed unwilling to backstop markets with rate cuts removes the Fed put that has cushioned prior selloffs, which matters enormously given how thoroughly markets have been conditioned since 2022 to expect rate relief on any sign of stress.
5. Elevated real yields compressing valuations. Two-year Treasury yields are up over 70 basis points year to date, flattening the curve against consensus positioning. Higher-for-longer rates mechanically compress the present value of long-duration growth stocks, AI names above all, and HSBC has explicitly flagged the curve-flattener unwind as one of the biggest pain trades of the second half.
6. Stretched sentiment with little room for disappointment. The Investors Intelligence advisors' survey shows 53 percent bulls versus 22 percent bears, a plus 31 point spread, elevated versus the long-run plus 25 percent average and not far from the plus 40 percent “defensive measures” zone the survey itself flags as dangerous. Extended bullish positioning historically means fewer buyers left to absorb a shock and more capitulation-driven selling once one hits.
7. USD/JPY carry trade unwind risk. With USD/JPY near ¥162, last seen in July 1986, and Japan's Ministry of Finance already having spent an estimated $73 billion defending the yen, we are sitting close to intervention territory. A sudden, forced BOJ or MOF response -- or a larger than expected BOJ hike -- could trigger a violent carry-trade unwind, echoing July 2024, when USD/JPY fell from 161 to 141 in three weeks, forcing leveraged funds to liquidate other assets, including U.S. equities, to cover margin.
8. Oil and inflation shock reversal risk. Much of the market's current calm assumes the Iran ceasefire holds and energy prices stay subdued. Any re-escalation would push oil and inflation back up just as the Fed is already leaning hawkish, potentially forcing a faster or larger hiking response than currently priced, a stagflationary combination that has historically hit equity multiples hardest.
9. Private credit stress spilling into public markets. Rising CDS spreads on AI-exposed credits such as Oracle, and heavy reliance on private credit for data center financing (Morgan Stanley estimates half of $3 trillion in 2025 to 2028 data center capex could be private-credit funded), raise the risk that a credit-market seizure -- not an equity-market trigger -- is what actually initiates the selloff, much as it has historically: LTCM in 1998, the Global Financial Crisis in 2008.
10. Forced-selling mechanics, not just sentiment. A bubble bursting is rarely about sentiment turning on its own; it is about investors being forced to convert paper wealth into cash to pay down debt, meet margin calls, or cover redemptions. With record equity concentration, elevated leverage in AI financing structures, and carry-trade unwind risk in FX all aligned at once, the ingredients for forced -- rather than merely emotional -- selling are unusually well lined up right now. It is worth noting that not everyone agrees: Goldman Sachs and JPMorgan remain on the calmer end of this spectrum, while Bank of America, Deutsche Bank, Ray Dalio, and Michael Burry are flagging real concern. This is a genuinely contested question on Wall Street right now, not a settled one.
Returning to Warsh, this thinking is not new for him
The philosophical map Warsh is laying out is consistent with critiques he has made for over a decade:
• He has long argued that locking the Committee into a pre-announced path can force the Fed to choose between honoring a stale signal and setting policy correctly when fresh data arrives; the dot plot and explicit guidance become a cage rather than a tool.
• The Fed only introduced routine press conferences under Bernanke in 2011 and added the dot plot in 2012. Warsh views this as a fairly recent, self-imposed constraint rather than a permanent feature of central banking -- and one that has gone too far.
• Fidelity's read on the broader agenda: “Warsh's vision could mean a Fed that holds the market's hand much less and spends more time on the sidelines, at times even making policy decisions that catch investors off guard.” A Fidelity strategist added that formal dissents among committee members may become more common given Warsh's preference for divergences of opinion, in contrast with Jerome Powell, who had a reputation for valuing consensus.
• Warsh has also expressed skepticism about the inputs the Fed leans on, not just the outputs it announces, wanting more weight on private, real-time data sources rather than lagging, heavily revised government statistics, on the theory that better real-time inputs reduce the need to lean on guidance as a crutch in the first place.
The practical effect, and the tension in it
Analysts immediately flagged that Warsh's plan is somewhat self-undermining: the Fed's committee-level transparency did not actually go away, because the dot-plot data from the other eighteen participants still got published and showed nine of them leaning toward a hike. As David Wessel put it on PBS, “Warsh's attempt to say we're not going to tell you what we're going to do was kind of undermined by the fact that they have a system where the other people are telling the markets what they think they're going to do.”
The net effect? Far less than a clean break from transparency than a shift in whose voice counts. Warsh has muted his own personal signal while the committee's collective signal -- still hawkish -- came through loud and clear anyway, which is part of why markets treated the meeting as hawkish despite Warsh's own studied vagueness.
The impact on the forex markets
• Dollar: DXY broke above 101 for the first time since May 2025, and the move continued through the end of June, with HSBC warning the rally could turn “explosive.”
• USD/JPY: Trading near ¥162, its highest since 1986, well above the ¥160 to ¥162 intervention zone repeatedly flagged by Japan's Ministry of Finance. Citi's late-May short USD/JPY call (entry 159.10, target 156, watch level 160.50) was invalidated by the post-meeting surge; the bank has since pivoted to forecasting JPY strength into year-end, sub-¥155, creating an unusual situation where Citi is short-term bullish USD/JPY on momentum but structurally bearish on a 6-to-12-month view.
• Rate-call dispersion has widened sharply: Bank of America now expects three 25 basis point hikes (September, October, December) to 4.25 to 4.50 percent, a complete reversal from its prior no-change call made the week before. Deutsche Bank has moved to two hikes. Goldman Sachs and JPMorgan remain in the no-hike camp, with Goldman still penciling in eventual cuts. Citi's house economists are openly contrarian, arguing the data point toward cuts, not hikes.
• Is Warsh talking tough just for political cover? Bank of America's own note on the meeting raised exactly this scenario: that Warsh's hawkish tone may be tactical, and that the five task forces could let him “buy time until inflation falls or his task forces make the case to stay on hold.”
Warsh's tone reinforced the dots of the hawkish members of the FOMC. He repeatedly emphasized price stability, stated the Committee was “unambiguous and unanimous” in its commitment to deliver it, and characterized elevated inflation as a policy choice resulting from insufficiently tight policy rather than an unavoidable shock. He did not rule out a hike and notably did not reaffirm the Fed's full-employment mandate in his opening remarks.
“New Fed Chair Warsh sounded a bit like old hawkish Fed governor Warsh at his press conference today, repeating multiple times the need for the Fed to deliver on its mandate for price stability.” — Krishna Guha, Evercore ISI
“The risk that they might need to raise rates has clearly risen given what we got today.” — Matthew Luzzetti, Chief U.S. Economist, Deutsche Bank
President Trump's reaction was telling. Asked about the prospect of a hike, he said only, “It could happen, it just keeps the country down, but we have a very good guy over there now, so I'm guided by what he wants,” a notably restrained response given his prior attacks on Powell over the same issue, and a sign Warsh has so far avoided an open break with the White House, despite not delivering the dovish pivot Trump appointed him to deliver.
Profile: Kevin Warsh and the Bernanke-era record
Understanding whether Warsh's hawkish opening is durable requires separating four distinct phases of his public record, which point in different directions.
Phase one: Fed governor, 2006 to 2011, the hawk
Warsh served on the Board of Governors through the run-up to and aftermath of the Global Financial Crisis, working closely with Chair Ben Bernanke and then-New York Fed President Timothy Geithner, and acting as a back-channel to Wall Street during the 2008 crisis, including helping negotiate his former employer Morgan Stanley's survival. His public communications in this period leaned consistently hawkish: Fed transcripts and speeches show him citing upside inflation risk more frequently than labor-market slack, even during the depths of the recession. At a September 2008 emergency meeting, as most colleagues focused on deflation and liquidity, Warsh was still flagging “upside risks of inflation.” Notably, despite this consistent hawkish commentary, he never formally dissented from a policy vote while on the Board.
Phase two: post-Fed critic, 2011 to 2025, the QE skeptic
After resigning from the Fed in 2011 over concerns about quantitative easing, Warsh became an increasingly vocal critic from outside, at the Hoover Institution and at Stanford. His core thesis: prolonged balance-sheet expansion misallocates capital, blurs the line between monetary and fiscal policy, and risks de-anchoring inflation expectations by letting temporary crisis tools become permanent. In a 2018 joint appearance with Bernanke marking ten years of QE, Warsh said his enduring concern was the “misallocation of capital in the economy, and the misallocation of responsibility in our government,” arguing such misallocations “tend to linger for years in plain sight.” This is the most direct intellectual throughline to his current posture: distrust of policy tools that substitute central-bank balance-sheet action for political accountability.
Phase three: 2025 campaign for the chairmanship, the dove
While Trump was considering him for the role, Warsh struck a markedly different tone, advocating for lower rates and arguing that AI-driven productivity gains were “structurally disinflationary.” In fact, he called them the most productivity-enhancing wave “of our lifetimes, past, present and future.” This framing would have let the Fed cut without officially declaring victory over inflation, since productivity gains were doing the disinflating instead. Many economists were skeptical at the time, noting that, in the short run, the surge in AI-related capex was arguably adding to inflation, not subtracting from it.
Phase four: as Chair, June 2026, the hawk returns, maybe
Three weeks into his term, with headline CPI at 4.2 percent -- the highest since 2023 -- and oil prices elevated by the Iran conflict, Warsh reverted to the tone of phase one. Citadel Securities' framework note on Warsh, published before his confirmation, anticipated exactly this: it argued that, taken together, his post-GFC writings imply a hawkish reaction function, and that any case for cuts built on a productivity shock would face pushback from hawks arguing that productivity shocks also tend to raise the neutral rate and risk appetite, warranting caution rather than easing.
The practical takeaway for positioning: Warsh's record contains genuine hawkish convictions, spanning nearly two decades across phases one and two, and a much shorter, more recently adopted dovish argument confined to phase three -- essentially a campaign-era position. When the data turned against the dovish case in real time, with inflation re-accelerating just as he took the chair, he reverted to his older, longer-held framework rather than forcing through the cuts he had floated. In my view that is consistent with the sense that his dovish framing was more opportunistic than his hawkish one.
Talking tough or tightening? The credibility question
My bet is that a heavy dose of cynicism is well warranted here, because cynicism is among the most valuable mental attitudes when trading. Should we really expect Warsh to start pushing for sharp rate increases immediately? Absolutely not. Assuming the ceasefire in Iran holds, the Fed will want to see how quickly inflation moderates without any further tightening. Oil prices have dropped sharply, but there will be a lag before that shows up at the pump. Gas prices will ease to some extent, and that will give the Fed cover before it needs to consider hiking. That would be a highly unpopular move right now, though it isn't obvious whether the relief from faster price moderation would outweigh the pain of higher rates in the public's mind.
More significantly, there is a growing risk that the underlying strength of the labor market is not nearly as robust as the Fed had been presuming. We may be on the verge of an ugly scenario in which the job market shows real weakness while inflation stays sticky. Warsh's reaction to that conundrum would tell us a great deal about his real views. Is this a realistic proposition? Consider today's release:
• Hiring slowed sharply in June even as the unemployment rate fell to 4.2 percent. Nonfarm payrolls increased by only 57,000, and data for the previous two months were revised lower by a combined 74,000.
• The labor force participation rate dropped to 61.5 percent, the lowest level in more than five years.
• The hiring slowdown was led by the biggest decline in leisure and hospitality payrolls since 2020, even as many economists had expected a boost from the World Cup. Retail trade and information sectors also shed jobs.
• Healthcare and social assistance continued strong hiring. Manufacturing payrolls edged up, though they remain slightly below early 2025 levels.
• The S&P 500 rose and Treasury yields fell as investors scaled back bets on a Fed rate increase this year.
My thinking is that, given the soft payroll numbers and the downward revisions, the market likely got ahead of itself with its hawkish expectations for Fed policy. Regardless of Warsh's tough talk, the Fed has a dual mandate, and I fully expect him to remain aware of it if the markets and the economy start to slide. Navigating a potentially stagflationary environment could actually freeze the Fed rather than push it to act in either direction, and that outcome would be quite bearish for the U.S. dollar. It is also worth remembering that a Fed unable to hike or cut removes both the safety net markets have relied on and the case for further multiple expansion; that’s bad news dressed up as good news for risk assets, not genuine relief. I also think, somewhat cynically, that Trump will give Warsh a short-term pass on his tough talk, but I doubt Warsh wants to be criticized publicly and repeatedly by the president if he actually pushes for aggressive hikes.
Positioning: FX views
The dollar index has finally squeezed high enough to force a lot of long-term bears to the sidelines and pushed many trend-followers into long dollar positions. Our strategy has been to fade this move in DXY and play for a resumption of the long-term dollar bear market. We want to take this one step at a time, and we think there’s a good chance the dollar weakens by a few percent from recent highs; at which point we will reassess and decide whether to take full or partial profits.
We feel the same way about individual dollar pairs such as EUR/USD, USD/CHF, and to some extent AUD/USD and NZD/USD. We still like these currencies against the Canadian dollar as well, though the cross trades will likely be slow-moving. EUR/CAD around 1.6170 provided a wonderful entry point for a long position. AUD/CAD at .9780 likewise was an attractive level to establish a long position. The Canadian economy has a plethora of problems right now, and Canadian interest rates are quite low, so being short the Canadian dollar on the crosses should be a good trade over time. As I have said before, when trading EUR/CAD, AUD/CAD, and NZD/CAD, patience is essential.
I am somewhat cautious on the British pound given the political situation, though higher yields in the UK provide some offsetting support against that political risk. The biggest unknown is the Japanese yen. The Nikkei has had a massive rally this year relative to the U.S. market, but it has come at real cost to Japanese consumers. Japan imports nearly all of its energy and roughly half of its food, so the weak yen is causing serious pain domestically.
Japanese carmakers are doing well because of the weak yen, but there is far more to the Japanese economy than auto exports. I think we are close to the point where the Bank of Japan and the Ministry of Finance will need to take fierce steps to reverse the yen's weakness. As I have noted before, when the yen turns, it tends to turn quickly; a move of twenty yen in a few weeks is not unimaginable. I am not certain the authorities are ready to act that aggressively, but I am confident that if they act, stopping at USD/JPY 155 will not be enough. They will need to keep pushing the dollar lower to overwhelm speculators who will want to fade any initial weakness. The deeper reality is that the world is massively short yen, and the authorities will likely need to drive the pair to levels that force the market to abandon those short positions. Could we see 164 or 165 first? Yes, but the higher the dollar goes from here, the less I would trust the move.
Finally, just a quick mention about Bitcoin. In my June 8, 2026 newsletter I noted that Bitcoin was due for a sharp, but short-lived corrective rally from the 61,000/62,000 level towards 68,000. It stopped just short of 68,000, but I hope you managed to put on a least a partial short at those levels. Since the rally failed, we traded as low as 58,500 before bouncing. I will have more to say about Bitcoin soon.
I will be writing again early next week. Until then, I want to wish you all the very best of luck in the markets.
Andrew Krieger
From Imre Gams
My Framework
I treat markets as auctions, not prediction machines.
Most sessions on a day-to-day basis are balanced.
Edges form at the extremes of value.
I trade acceptance and rejection at those edges.
If value migrates, I align with it.
If it fails, I trade the rotation.
I am not in the business of forecasting.
I am in the business of validating participation.
_________________________________________________________
ES gapped up small on the Sunday open and ran straight into the control zone at 7423 to 7485. Then it stayed. Price spent most of the week working inside the band, which shows how much business the market wanted to do at those prices. Sellers leaned and pushed price under the zone late in the week. Friday's bounce came up to test the zone from below, stalled, and the week closed just under it. No upside or downside target came into play. Price worked the control zone and nothing else.
Step back and nothing has changed. ES has churned sideways since the middle of May. Neither side has dragged price away.
So the parameters hold. The control zone is the battleground.
Bull case. Buyers need more than a poke above 7485. They have to trade up there and hold it. Reclaim the zone and the upside targets come back, 7629 to 7639 first, then 7672 to 7694.
Bear case. Stay under 7423 and sellers keep the edge. That puts 7278 to 7300 in play, then 7184 to 7209 under it.
It comes down to one band. The 7423 to 7485 control zone tells us who runs the next move.
Price hit the final downside target last week. It reached the 3958 to 3962 zone, the last marker on the board after months of selling. Right on cue. That zone now becomes key support, and gold bounced off it hard. The week closed back at 4103, sitting right at the 4107 level.
That changes the job for 4107. It was a downside target. Now it flips to the first upside target, and Friday's trade already reached it.
One read sits on the table. Gold may have carved out a structurally important low last week. That stays a hypothesis until price proves it. We wait and watch.
Bull case. A pullback to start the week brings 4107 back into reach. Hold above it and build value there, and the control level at 4259 comes into play. Establishing value above 4259 is the real hurdle. Clear that and buyers take the auction, which opens 4536 to 4586, then 4722 to 4785 above.
Bear case. Lose the 3958 to 3962 key support and the low thesis dies. A break there forces a fresh look at how much further down this market wants to go.
Everything now hangs on the 3958 to 3962 support. That zone holding is what keeps the low hypothesis alive.
Crude broke down out of the control zone this week. Price left the 73.68 to 77.22 band and dropped straight to 71.54, the level we marked as the prior downside target. It reached it cleanly. Crude now trades below it near 70.24, sitting between 71.54 and the last target underneath.
I favor crude working toward an important tradable bottom. One final downside target sits below at 67.84. Reach it and I start looking for an imminent bottom in this market. That stays a view until price backs it up.
Bull case. The first job is reclaiming 71.54. Win it back and the larger task is the control zone at 73.68 to 77.22. Getting back above that band is the real obstacle for buyers. Clear it and the upside targets come into play, 79.77 to 81.16 first, then 83.20 above.
Bear case. A push to 67.84 brings the last target on the board into reach. I am watching that level as the spot where this down move ends, not as a fresh breakdown. Break and hold below 67.84 and the bottom thesis comes off the table. That forces a fresh look at how much further down this market wants to go.
Everything points to 67.84. That is the last target left, and it is the level I am watching for the bottom.