Kevin Warsh, President Donald Trump\u2019s nominee to replace Jerome Powell as Federal Reserve chair, told the Senate Banking Committee that he wants fundamental policy reforms. He linked reform to cost-of-living pressures and said the Fed should focus on price stability and stay within its remit.<\/p>\n
He called for a new inflation framework, different use of tools, and clearer communications. He said the interest-rate tool is fairer than bond buying and that the Fed should leave \u201cthe fiscal business\u201d.<\/p>\n
Warsh said the Fed should be willing to change its mind and correct mistakes quickly, and he expressed scepticism about forward guidance. He also said Fed officials speak too much in advance about the rate path.<\/p>\n
He said inflation risks have improved somewhat, but that inflation data is imperfect and policy works with lags. He said he disagrees that tariff policy explains an inflation overshoot, and said AI effects mean the Fed should revisit its models.<\/p>\n
Warsh said a smaller balance sheet could allow lower rates, better inflation outcomes, and a stronger economy. He will testify on Tuesday at 09:00 GMT.<\/p>\n
The CME FedWatch Tool shows about a 60% probability of the policy rate being unchanged at 3.5%\u20133.75% at end-2026. In January, markets forecast three 25 basis point cuts this year, but expectations shifted after crude oil rose amid US and Israeli action against Iran and related inflation fears.<\/p>\n
Given the current date of April 21, 2026, our immediate focus must be the geopolitical risk from Iran. With the ceasefire expiring this Wednesday and an extension looking unlikely, volatility in the oil market is the primary concern. We have already seen West Texas Intermediate crude oil surge from around $85 in January to over $110 a barrel, directly impacting inflation expectations.<\/p>\n
The potential for a new Fed “regime change” under Kevin Warsh suggests we should prepare for a more hawkish and less predictable central bank. His skepticism of forward guidance means we will receive less hand-holding on the future path of interest rates. This implies that volatility around future Fed meetings will likely increase, a factor we must price into our options strategies.<\/p>\n
Warsh\u2019s comments about shrinking the balance sheet are critical for the bond market. His view that a smaller balance sheet could ultimately allow for lower rates suggests a commitment to Quantitative Tightening, which could put upward pressure on long-term yields even if the policy rate is held steady. We remember the market’s reaction during the “taper tantrum” of 2013, and the Fed’s balance sheet is still near $7 trillion, a level Warsh seems eager to reduce.<\/p>\n
The market has correctly repriced expectations away from the three rate cuts we anticipated back in January. The CME FedWatch Tool now shows a 60% probability of rates remaining at their current 3.5%-3.75% level through the end of the year. In the coming weeks, we should consider using derivatives to hedge against the growing possibility that the next move could be a hike if energy prices remain high.<\/p>\n
His preference for “chaotic meetings” and a diversity of views means the consensus that guided us in the past may disappear. This makes directional bets riskier and options that profit from volatility, such as straddles on equity indices and bonds, more attractive. We must adapt to an environment where the Fed is comfortable correcting its mistakes quickly and without prior warning.<\/p>\n
Create your live VT Markets account<\/a>\u00a0and\u00a0start trading<\/a>\u00a0now. <\/b><\/p>\n","protected":false},"excerpt":{"rendered":" Warsh urges Fed reforms, prioritizing price stability, less bond buying, smaller balance sheet, clearer communication, fewer speeches.<\/p>\n","protected":false},"author":87,"featured_media":0,"comment_status":"","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[59],"tags":[],"class_list":["post-45282","post","type-post","status-publish","format-standard","hentry","category-live-updates"],"acf":{"acf_article_selection_author":null},"aioseo_notices":[],"aioseo_head":"\n\t\t\n\t\n\t\n\t\n\t\n\n\t\t