Trump selected Warsh to lower interest rates. However, on May 15, when Warsh formally took over the chair left by Jerome Powell, he inherited not a Fed ready to cut rates, but an FOMC where three governors even disagreed with "hinting at a possible future rate cut."
Those three dissenting votes—from Cleveland's Hammack, Minneapolis's Kashkari, and Dallas's Logan—cast the most unusual dissent since October 1992 at the late April meeting. They were not opposing a rate cut; they were opposing a "tone that was too dovish." They believed that in the current inflationary environment, there should not even be a hint of rate cuts.
Warsh inherited a central bank on the verge of tearing itself apart from within.
**A Man Misread by the Market** The market's mainstream view of Warsh stems from two unreliable sources.
First, Trump selected him because he wants rate cuts. The logic is—pick him, and he will cut. Second, during his confirmation hearing, Warsh showed some agreement that "the Iranian oil shock is transitory," which was interpreted as a dovish signal.
Both inferences skip over the most authentic aspect of Warsh's past fifteen years.
In November 2010, the Fed was debating QE2—whether to purchase an additional $600 billion in Treasury securities. Warsh voted in favor that day. The same week, he published an article in The Wall Street Journal criticizing QE2. Voting in support while writing in opposition is extremely rare in Fed history, later termed "silent dissent" by researchers—not true agreement, but an unwillingness to disrupt consensus.
At that time, core PCE never exceeded 2.5%, and unemployment was as high as 10%. There was no obvious inflationary pressure, yet between 2006 and 2011, Warsh gave 13 speeches specifically mentioning "upside risks to inflation." While other governors were still discussing how to support employment, he was already worrying about an enemy that had not yet appeared.
Now that enemy is at the door. April's CPI was 3.8%, a three-year high. The energy shock from the Iran war pushed gasoline prices up 28.4% year-over-year and fuel oil up 54.3%. In Warsh's first week, the 30-year Treasury yield touched 5.19%, just one step away from the 2007 high.
**Inflation is Not Just an Iran Problem** There is a reasonable kernel in the dovish argument: the Iranian oil shock is an exogenous event. If negotiations in the Strait of Hormuz make progress and oil prices fall from over $100 back to $75-80, energy inflation would recede quickly, CPI numbers would naturally improve, and Warsh would gain a window to cut rates.
This logic holds. But there is one line in the April inflation data that makes it less clean.
Services inflation jumped to a monthly rate of +0.5% in April. In March, that number was +0.2%.
Services inflation contains little gasoline. Dining, healthcare, transportation services, entertainment—the rise in these prices is not directly related to Hormuz. The housing component contributed a doubled monthly increase of +0.6% over the same period. Core CPI, excluding food and energy, rose +0.4% month-over-month in April, the fastest single-month increase since late 2025.
In other words, inflation is spreading from the energy side to the services side. Once this process begins, even if oil prices fall back to $80 tomorrow, service-side price pressures will not disappear in two or three months.
This is precisely the old path the Fed misjudged as "transitory" in 2022. At that time, Powell said inflation was transitory. By the time he realized the stickiness of services inflation had formed, he had to use the most aggressive rate-hiking cycle to catch up. Warsh has historically been earlier than the market to awaken to inflation issues—this time, he is unlikely to make the same mistake again.
**The FOMC He Inherited** There is another thing the market has not fully priced in: the Fed Warsh took over is internally divided to an unusual degree.
The April 28-29 meeting, which kept rates unchanged, had a surface voting result of 8-4. An 8-4 split is itself abnormal—the last time there were four dissents was in October 1992. But what is more subtle is the direction of these four votes: three opposed hinting at rate cuts, one supported a rate cut. The board had dissents in both directions simultaneously.
In the FOMC statement, the committee changed its description of inflation from "somewhat elevated" to "elevated." This wording upgrade was underestimated by the market. In the Fed's language system, this is not a minor tweak; it is the board clearly telling the market: our tolerance for inflation is shrinking.
As chairman, Warsh must build consensus within this board. He faces three voting members—Hammack, Kashkari, and Logan—who believe that even a hint of "the next step could be a rate cut" should not appear, each more eager to tighten than he is. To cut rates, he must first convince these three.
Right now, no one can tell you how he will achieve this.
**The Hidden Issue of the Neutral Rate** There is another debate that has not entered the mainstream narrative, but it may be the most important background to the entire situation.
The Fed's median estimate for the neutral interest rate (r-star) is around 3.0%. The current federal funds rate is 3.5%-3.75%, so from this perspective, monetary policy is in a "restrictive" range—it is putting the brakes on the economy, and inflation will slowly come down.
However, the Cleveland Fed has a model that estimates the neutral rate at 3.7%. If this estimate is closer to reality, the current 3.5%-3.75% is not truly restrictive, at best "neutral to slightly tight," insufficient to persistently suppress inflation.
In his past research and speeches, Warsh has consistently leaned toward the view that r-star is higher than the committee's estimate. If, after taking office, he pushes the Fed to reassess its neutral rate assumptions, it would mean not only is there no room for rate cuts, but the premise that "current policy is already tight enough" would also be called into question.
The market has not priced in this scenario.
**Another Political Equation** Trump spent nearly a year placing a person willing to "cut rates significantly" into the Fed chair's seat. This act itself has already altered the Fed's political ecosystem.
The confirmation vote was 54-45, the closest Fed chair confirmation in history, more divided than any previous one. During Powell's tenure, Trump had congressional testimony records subpoenaed by prosecutors and publicly mocked him as "too late." The renovation of the Fed's headquarters was used as a political tool, and the Fed's independence crisis became one of the most watched themes of 2025.
Warsh's current predicament is: he was selected to cut rates, but the conditions for cutting do not exist; if he insists on not cutting, Trump's next reaction is unpredictable; if he cuts rates under political pressure, inflation will tell the market the Federal Reserve is no longer independent.
This is not a problem with a standard answer.
**Where Assets Are Headed** Look at the bond market first.
Long-end U.S. Treasuries have been the most honest scorekeeper of this macro narrative. The 30-year yield has moved from 4.4% at the start of the year to 5.19%, and the 10-year yield to 4.67%. Barclays' Ajay Rajadhyaksha explicitly stated: 5.5% is not the top; they are warning this level will be breached. Citi's macro rates strategist McCormick said 5.5% has become traders' new "round number target."
The mechanism pushing long-end yields higher is not complicated: at the June 16 FOMC, if Warsh's statement contains any wording close to "not ruling out further tightening," the 30-year Treasury will be repriced to the 5.3%-5.4% range within 30 minutes that day. At that point, 5.5% is not a prediction; it is the next stop.
Failure condition: If Iran peace talks see a substantive breakthrough before the June FOMC, the Strait of Hormuz reopens to navigation, and oil prices fall from $102 to below $80—then May and June CPI data will show clear improvement, long-end rates have a chance to fall back, and this judgment needs a full revision.
Tech stocks are the second in line. The Nasdaq's forward P/E has already compressed from last year's peak of 33x to around 27x, but the historical average is near 20-22x. As long as the 10-year Treasury yield remains stable above 4.5%, it acts as a ceiling for tech stock P/E multiples. The first stage of compression was "the disappearance of rate cut expectations," and the second stage is "the rekindling of rate hike expectations"—there is a hurdle between these two stages, and we have just crossed the first one.
Specifically: after the call ends that evening, funds will first watch for any hint of a rate cut timeline in Warsh's wording. If there is none—the current base case—the Nasdaq's pullback will hit tech heavyweight stocks within 48 hours.
Gold is the most ambiguous to read within this framework. Theoretically, rising real rates are negative for gold, but real rates are nominal rates minus inflation expectations—if the market starts worrying about Fed independence, inflation expectations themselves could be revised upward, potentially offsetting the pressure from rising rates on gold. Add to that the continued expansion of the U.S. fiscal deficit and ongoing gold purchases by foreign central banks for de-dollarization, gold could see a scenario of "rising rates but prices not falling." This is not the main judgment, but an edge case that needs observation.
The U.S. dollar is relatively straightforward: rekindled rate hike expectations → dollar strengthens. But if the market concludes that the Fed independence issue has become structural, this logic will be discounted.
**The Most Important Thing Before June 17** Progress in Iran peace talks is the biggest variable in all of this.
Iran's Foreign Minister Araghchi said last week that an agreement is "inches away"—while also saying "there is zero trust in the Americans." Trump called off a planned military strike on Iran on May 19, citing "serious negotiations are underway." But the Strait of Hormuz remains effectively under control, and the issue of transferring 40 kilograms of highly enriched uranium is not yet resolved.
If negotiations break down before June 16, oil prices return to $110+, May's CPI will likely exceed expectations again, and Warsh's first FOMC meeting will start under the worst scenario. If a breakthrough occurs before then, oil prices fall, and inflation data improves, the entire "Warsh backed into a corner" logic softens.
The former is negative for both bonds and tech stocks; the latter gives Warsh some temporary breathing room—but even then, the endogenous stickiness of services inflation will not disappear, at best postponing the issue by a few months.
**June 17** The most important Fed date this year is June 17 at 2:30 PM—when Warsh takes the stage to release the FOMC statement from his first chaired meeting, then answers reporters' questions.
That day, every word will be repeatedly analyzed: whether he uses "patient" or "vigilant," whether he mentions rate hikes, how he describes the persistence of inflation, how he answers questions like "what are your conversations with Trump like."
The answers will tell the market how much it mispriced Warsh, and how long it will take to correct that mistake.
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