We get the Fed tomorrow. It's the second Fed meeting with Kevin Warsh at the helm.
The market is pricing the odds of a rate hike at roughly 30%, and better than a coin flip on two (quarter point hikes) before year end.
The old Fed doesn't like to disappoint markets — using forward guidance to steer expectations, then citing market pricing to justify their move.
With that, in his first press conference as Chairman (on June 17th), Warsh said this: "I've said for years, inflation is a choice." Then he told the room the committee is unanimously determined to deliver on price stability.
Wall Street heard a hawk.
The Fed's preferred inflation gauge (PCE) days later printed 4.1%.
If inflation is a choice, and you've promised to fix it, you hike rates. Right?
Not so fast. The Warsh-led Fed, if we listen to his words, is not the old Fed.
The "Warsh doctrine" has been laid out for the better part of the past year, since Jerome Powell's job was under threat, and Warsh became a short list candidate. He began to publicly sell his policy views.
And if we listen to those views along the way, we know he sees inflation getting back to the Fed's target by way of two drivers: 1) a smaller balance sheet, and 2) AI — "AI is going to make everything cost less."
Those two do the work.
First, the balance sheet. Fifteen years of expansion, which we've long argued is what carried gold from under $1,000 to over $5,000, was a quantity-of-money story, not a rates story.
And remember, the Powell Fed stopped and reversed on the balance sheet as Powell was walking out the door (stopped shrinking, started expanding again as of December). The Fed has added $212 billion to the balance sheet in seven months.
The second piece, Warsh thinks artificial intelligence is a structural disinflationary force.
In his first press conference last month, he called it "American ingenuity." He said strong, productivity-led growth is "not something that we fear, but something we embrace."
So, the old Fed raises rates to slow the economy down.
The Warsh-led Fed thinks the economy running hot on productivity is the cure, not the disease.
You do not hike into your own cure.
