MW The oil shock meets the Fed 'curse': What Kevin Warsh means for your portfolio
By Vlad Signorelli
Market downturns typically tag new central-bank leaders. And Warsh faces a tough choice between crushing demand or saving the bull market.
Kevin Warsh is facing unexpected constraints on interest rates and the economy.
Warsh was supposed to act as the rate-cutting release valve for Trump's second term. Instead he inherits an energy shock layered on top of an economy that needs more capital.
New U.S. Federal Reserve chairs have a rough tradition: The stock market almost always hands them a sharp correction during their first three months on the job. The pattern has held consistently since the 1930s.
Kevin Warsh, freshly sworn in at midday Friday as Fed chair, is about to find out how real it is.
Since the 1930s, the S&P 500 SPX has delivered an average three-month drawdown of 12% soon after a new chair takes office. Jerome Powell: down 7%. Janet Yellen: 4%. Ben Bernanke: 2%. But Alan Greenspan and Eugene Mayer each saw drops exceeding 30%. Barclays and Bloomberg have tracked the pattern for years.
It is one of the most reliable - and least discussed - risks facing any new Fed leader.
The S&P 500 just hit an all-time high on May 14 at 7,501. Warsh could be walking into a proverbial market top - or this could simply be the latest temporary wall of worry in an AI-driven bull market that mature leadership can navigate.
President Donald Trump posted on his Truth Social platform earlier this week that he paused a planned strike on Iran at the request of the leaders of Qatar, Saudi Arabia and the United Arab Emirates. Serious negotiations, they were said to believe, could produce a deal acceptable to the United States and the region. At the same time, Treasury Secretary Scott Bessent announced a temporary 30-day waiver allowing vulnerable countries to access the Russian oil that is currently stranded at sea - a concrete supply-side step aimed at stabilizing physical crude markets while reducing China's ability to stockpile such stores.
The bond market is watching closely. The yield on the 10-year Treasury BX:TMUBMUSD10Y now sits at roughly 4.6%. It has been sensitive to every headline out of the Gulf and especially the 1- to 12-month crude-oil (CL00) spread.
Market expectations for rates are equally telling. Federal-funds futures are currently pricing in roughly an 83% chance that the Fed will deliver one interest-rate hike (a quarter-point increase) between now and the end of 2026. There's about a 17% chance the U.S. central bank leaves rates completely unchanged through the rest of the year. No rate cuts are being priced in at all.
This is Warsh's first great test - and a test of whether Washington still remembers supply-side economics.
Read: Trump tells Warsh 'to be totally independent' as Fed chair. 'Don't look at me,' president says.
Warsh does not control the military or diplomatic track. But he will deal with its market consequences.
Warsh was supposed to act as the rate-cutting release valve for Trump's second term. Instead he inherits an energy shock layered on top of an economy that needs more capital formation, not less.
See: Kevin Warsh takes over as Fed chair today - after first swearing-in at White House in 40 years
Warsh faces three broad options. He can look through the Strait of Hormuz-driven shock and advocate for holding rates steady. He can sign on to tightening in classic "Volcker-lite" fashion and risk turning a supply shock into a domestic credit event. Or he can push for a rate cut to keep credit flowing and let high prices call forth new supply, substitution and efficiency.
During his April 21 confirmation hearing, Warsh emphasized the importance of focusing on underlying inflation rather than one-time price changes. He stated that he is most interested in "What's the underlying inflation rate? Not what's the one-time change in prices because of a change in geopolitics?"
This does not mean pretending $100-plus oil is harmless. It means recognizing that the right response to a geopolitical supply constraint is not necessarily to crush demand. The better response is to keep capital formation alive and allow high prices to do what they are supposed to do: mobilize new supply, logistics improvements and investment.
The cure for high oil prices is still high oil prices - provided capital is allowed to respond. That must be the heart of the Warsh doctrine.
The cure for high oil prices is still high oil prices - provided capital is allowed to respond.
That must be the heart of the Warsh doctrine going forward. The Fed cannot reopen the strait. It cannot shoot down drones or force a grand bargain in Tehran. But it can refuse to add a credit shock on top of an energy shock. It can refuse to solve a geopolitical bottleneck by breaking housing, small business, traditional manufacturing and capital spending.
The diplomatic pause and Bessent's Russian-oil waiver buy Warsh time. They are exactly the kind of visible supply-side progress the bond market needs to see before it will accept a rate cut. Any easing must still be framed rigorously: The Fed is not validating inflation; it is preventing the Iran war shock from becoming a credit shock. The Trump administration, meanwhile, must keep delivering energy permits, insurance flexibility, refinery utilization, strategic stockpiles and the diplomatic path that actually reduces the Hormuz risk premium.
Capital-gains indexing for inflation would be the cleanest complement: It raises the after-tax reward for deploying capital into productive assets precisely when the economy needs it most.
History offers a cautionary parallel. In 1990-91 the Fed initially looked through the Gulf War oil shock. But prior tightening, a credit crunch and poorly timed fiscal moves turned a temporary disruption into a recession.
Warsh does not control the military or diplomatic track. But he will deal with its market consequences. With yields already testing 4.6%-plus, futures pricing in later hikes, and a narrow window of de-escalation opening, Warsh has a rare opportunity. He can choose not to compound an energy shock with monetary restraint that damages capital formation and productivity growth exactly when the economy needs both.
Hormuz is now closing in on Warsh's priors. His first test is whether he can seize the initiative - before the bond market seizes it for him.
Vlad Signorelli is president of Bretton Woods Research, a macroeconomic forecasting firm.
More: : 'Buffett Indicator' warns of a market top - 8 crucial signs that stocks are running on fumes
Also read: The bond market just flipped the script on investors - Wall Street is acting like nothing's wrong
-Vlad Signorelli
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May 22, 2026 13:58 ET (17:58 GMT)
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