Tag: federal-reserve

Intro to Kevin Warsh

Let do a deep dish into Kevin Warsh — not the bio stuff, but how he thinks, how markets would re-price under him, and why people are split.

Kevin Warsh: Deep Dive 🧠📊

1️⃣ His core worldview (this matters more than labels)

Warsh is often described as an inflation hawk, but that’s incomplete.

A better framing:

He’s a credibility hawk.

He believes:

  • The Fed lost credibility by staying too loose for too long
  • Balance sheet expansion distorted markets
  • Monetary policy became a substitute for fiscal discipline (which he hates)

He’s less obsessed with today’s CPI print and more worried about:

  • Long-term inflation expectations
  • Dollar credibility
  • Political capture of the Fed

2️⃣ His biggest break with Powell-era Fed

Warsh vs Powell in one sentence:

  • Powell: “We’ll adjust policy as data evolves”
  • Warsh: “Policy mistakes come from bad frameworks, not bad data”

What Warsh dislikes:

  • QE becoming “normal”
  • Emergency tools used in non-emergencies
  • Forward guidance that locks the Fed into corners

He’s publicly criticized:

  • The size of the Fed’s balance sheet
  • The belief that inflation was “transitory”
  • The Fed’s communication becoming political theater

3️⃣ Is he really dovish now?

This is the trickiest part — and where markets can misread him.

Here’s the nuance:

Warsh can support lower rates if:

  • Inflation expectations are anchored
  • Fiscal policy is credible
  • The Fed regains institutional authority

But he hates cutting rates:

  • To support asset prices
  • To finance deficits
  • To bail out bad fiscal policy

So:

He is not dovish by default — he’s conditional.

This is very different from how markets currently price Fed behavior.

4️⃣ Treasury–Fed “coordination” (this is the controversy)

Warsh has floated the idea of a new Treasury-Fed Accord.

Supporters say:

  • Better crisis coordination
  • Less policy confusion
  • Clearer division of labor

Critics hear:

  • Reduced Fed independence
  • Political pressure on rates
  • Debt monetization risk

Markets would immediately ask:

“Is the Fed still the adult in the room?”

This is the single biggest market risk if Warsh becomes Chair.

5️⃣ What markets would do under a Warsh Fed

📉 USD (initially volatile, then stronger)

Short term:

  • FX volatility
  • Some concern about independence

Medium term:

  • USD likely stronger
  • Warsh prioritizes credibility + inflation expectations
  • Less tolerance for persistent negative real rates

Think:

Less structural USD bleed, more discipline.

📈 Rates & bonds

This is where the biggest repricing happens.

  • Short end: more policy uncertainty
  • Long end: depends on credibility

If markets believe:

  • Warsh reins in QE
  • Forces fiscal discipline indirectly

👉 Long-term yields could fall despite tighter rhetoric.

If not?
👉 Term premium explodes.

📉 Stocks

  • Short-term: choppy, multiple compression risk
  • Long-term: healthier market structure

Tech:

  • Loses some “Fed put” premium
  • But benefits if USD stabilizes and inflation risk drops

Small caps:

  • More vulnerable (less balance sheet resilience)

🥇 Gold

Gold’s reaction to Warsh is fascinating:

  • If Warsh restores Fed credibility → gold down
  • If Treasury–Fed coordination looks political → gold rips

Gold becomes a confidence barometer, not just inflation hedge.

6️⃣ Why Trump likes Warsh (important context)

This isn’t just about rates.

Warsh:

  • Understands markets deeply
  • Communicates clearly (investors respect him)
  • Criticizes Fed bureaucracy without sounding reckless

Trump:

  • Wants lower rates
  • Wants someone who looks credible
  • Wants someone markets won’t instantly revolt against

Warsh is the “respectable regime change” candidate.

7️⃣ Senate confirmation risk

This won’t be smooth.

Expect questions on:

  • Fed independence
  • Coordination with Treasury
  • Views on QE and crisis tools

Markets will trade:

  • Confirmation odds
  • Tone of testimony
  • First hints about balance sheet policy

This process alone can move:

  • USD
  • Gold
  • Long bonds

8️⃣ Big picture: why Warsh matters right now

This is happening at a fragile moment:

  • USD already weakening
  • Deficits exploding
  • Shutdown risk
  • Geopolitical stress
  • Markets addicted to liquidity

Warsh represents:

A possible pivot away from “liquidity-first” policy.

That’s why:

  • Some investors are excited
  • Some are deeply nervous

Bottom line (the honest take)

If Warsh becomes Fed Chair:

✅ Pros:

  • Stronger institutional credibility
  • Less policy drift
  • Better inflation anchoring
  • Potential USD stabilization

⚠️ Risks:

  • Market tantrums
  • Reduced Fed flexibility
  • Political pressure optics
  • Mistiming tightening in a fragile economy

He’s not a chaos candidate, but he would force markets to grow up a bit.

Will the Feds Hold Interest Rates Steady?

Here’s the current consensus around U.S. Federal Reserve interest rate expectations — are markets expecting the Fed to hold rates steady or cut them? The answer is both in different time frames, and the context matters a lot:

🔹 Short-term outlook (next Fed meeting)

  • The Fed is widely expected to hold interest rates steady at the upcoming January 2026 meeting, with no cut announced right now. (Investopedia)
  • Fed officials are signaling they want to keep policy focused on data, not politics, and aren’t likely to cut this week. (AP News)
  • Wall Street commentary also suggests policymakers are more cautious than aggressive on rate moves right now. (Morningstar)

Bottom line: Hold expected at current levels (often cited around 3.5–3.75% as of the latest cycle). (Trading Economics)

🔸 Medium-term view (through 2026)

Here, opinions diverge:

✅ Markets still price in potential cuts later in 2026

  • Some economic projections (dot plots) have shown markets expecting one or two quarter-point cuts later this year as inflation cools. (Trading Economics)
  • A nonpartisan U.S. budget office report also projects a lower final rate by year-end 2026. (The Telegraph)

⚠️ But many economists now think cuts may not happen until later or not at all

  • Recent surveys of economists show most think the Fed will hold through at least the first quarter and possibly longer due to inflation still above the 2% target and continued moderate economic growth. (Investing.com)
  • Some major bank forecasts (e.g., JPMorgan) have shifted to expecting no rate cuts in 2026 and even a potential hike later if growth and jobs stay strong. (Reddit)

Why this divergence?

  • Inflation: still above the Fed’s 2% target in many measures.
  • Labor market: remains relatively tight in parts of the data.
  • Economic growth: decent enough that the Fed may not need to cut quickly.

📊 So what’s the practical expectation?

Here’s a simplified market consensus snapshot:

Time frameExpected Fed action
Next policy meeting (Jan 2026)Hold steady
1Q–2Q 2026Still likely hold; cuts not widely expected yet
Late 2026Some markets price possible cuts, but economists are mixed

🧠 Key drivers shaping expectations

No cut likely right now because:

  • Inflation remains elevated vs target.
  • Fed officials emphasize data dependency.
  • Economic resilience (especially jobs) reduces urgency for easing. (CBS News)

Cuts could still happen later if:

  • Inflation falls closer to target.
  • Growth slows meaningfully.
  • Labor market weakens.

🔎 What markets are currently pricing

Financial markets (via futures and yield curves) still reflect some probability of cuts by mid-late 2026 — but those odds have been pulled back recently as strong data and official comments push the expected timing later. (Trading Economics)

📌 Bottom line

Right now: The Fed is expected to hold rates steady at the next meeting.
Looking forward through 2026: There’s no strong consensus yet — market pricing suggests possible cuts later in the year, but many economists now think cuts may be delayed or may not come if inflation and growth stay firm.

Probability of Another Rate Cut and Market Outlook

Here’s a breakdown of the likelihood of another Federal Reserve rate cut and what that could mean for markets:

✅ Probability of Another Rate Cut

  • Market-based tools (like the CME Group FedWatch Tool) show ≈ 90%+ probability of a 25-basis-point cut at the next meeting (late October 2025).
  • Futures markets are also pricing in ~70–80 basis points of total cuts in 2025 after the already-announced September cut.
  • While a cut is very likely, there’s uncertainty about magnitude and timing beyond the next meeting; the Fed emphasizes it’s not on a “preset path.”

📊 Market Outlook Given Another Rate Cut

What the market is likely to do

  • Stocks: Growth stocks (especially tech and long-duration names) and rate-sensitive sectors (housing, REITs) may rally as borrowing costs decrease and future earnings look more valuable.
  • Bonds: Short-term yields should fall as the policy rate is cut; long-term yields may fall too if growth/ inflation fears dominate, which means bond prices rise.
  • U.S. Dollar: Likely to weaken somewhat — lower short-term interest rates reduce foreign-investor demand for USD-denominated assets.
  • Gold & safe assets: Could benefit as real yields (nominal yields minus inflation) drop, enhancing the appeal of non-yielding but inflation/allocation assets.
  • Commodities: May get a boost, especially if the cut is seen as pre-emptive and supports growth; but if the cut signals deepening economic weakness, commodities may falter.

Potential caveats & risks

  • If the cut is seen as a signal of economic weakness (rather than confidence) — e.g., labor market weak, growth faltering — then markets may start to worry about earnings declines and recession risk, which could offset the initial positive reaction.
  • If inflation remains sticky, the Fed may highlight caution about further cuts; growth/tech may lag if rate cuts appear insufficient to stimulate.
  • The magnitude of reaction may depend on communication: how the Fed frames forward guidance matters as much as the cut itself.

M2 Money Supply is at an all-time high and what this means

M2 money supply is at an all-time high (or reaching record levels), that’s a meaningful macro signal. Whether it’s “good” or “bad” depends heavily on other factors (velocity of money, inflation, growth, how the Fed responds). Here’s how to think about it, and what it could imply for markets:

🔍 What M2 Captures & Why It Matters

  • Definition: M2 is a broad monetary aggregate that includes currency in circulation, checking deposits, savings accounts, time deposits under $100,000, and certain money market funds.
  • Liquidity gauge: Because M2 includes funds that are relatively liquid, a high M2 signals there’s a lot of money “in the system” that could be deployed into spending, investment, or asset markets.
  • Theoretical link to inflation: Classic monetary theory (e.g. the Quantity Theory of Money) suggests that increases in money supply, if velocity is stable or rising, tend to lead to inflation—i.e. “too much money chasing too few goods.”

But in practice, that link is messy because velocity, credit conditions, and demand matter too.

⚠️ Caveats / Moderating Factors

  • Velocity of money is often declining — money may increase, but people might hold it rather than spend it.
  • Credit constraints / risk aversion can inhibit money from circulating (i.e., banks may not lend, businesses not invest).
  • Time lags: Money supply changes may take months or years to show up in inflation, growth, or asset prices.
  • Policy reaction: If inflation surprises, the Fed can tighten (or delay cuts), pulling back some of the effect.

📈 Market Impacts of High M2

If M2 is indeed at a record high, here are the likely ripple effects across markets (assuming other conditions like some inflation pressure and a somewhat stable growth environment):

Market SegmentExpected Reaction / RiskWhy
Equities (growth, small-cap, cyclical)Positive tailwindMore liquidity → more capital chasing returns → supports risk assets
Real estate / REITsFavorableMore money available for mortgage credit or property investment
Commodities / Inflation-linked assetsUpward pressureInflation expectations rise; commodity demand stronger
Bonds / YieldsHigher yields / yield curve steepeningMarkets may price in inflation, reducing bond prices
Dollar (FX)Potential weakeningMore money supply can devalue currency if inflation expectations shift upward

🧭 What It Means for the Fed and Policy

  • A high M2 gives the Fed less room to cut aggressively, because too much money in the system already threatens inflation overheating.
  • The Fed may lean more cautiously or even hold rates or tighten if inflation surprises upward.
  • If the Fed does cut, markets may interpret cuts more as acknowledging growth weakness rather than easing inflation — less uplift than expected.

Looking at recent data, there is support for the idea that the high M2 is pushing (or at least exerting pressure on) inflation, but it’s not a perfect one-to-one relationship. The relationship shows up more strongly over longer lags. Here’s what I found and how to interpret it:

📊 Recent M2 Growth & Inflation Metrics

Here are some specific figures and observations from recent data:

  • M2 Level & Growth
    • M2 (seasonally adjusted) in August 2025 was about $22,195.4 billion (≈ $22.20 trillion)
    • Over the past year, M2 has grown ~ 4.77% year over year
    • Month over month (Aug vs Jul) it rose by ~0.36%
  • Inflation / Price Metrics
    • The chart from LongTermTrends plots historical yearly M2 growth vs CPI inflation, showing that over many periods, M2 growth and inflation tend to move together (though with lag)
    • The St. Louis Fed’s analysis notes that historically, inflation has “followed” M2 growth with a lag (often 6–18 months), consistent with monetarist views.
    • The St. Louis Fed also emphasizes that the relationship has “long and variable lags” — meaning M2 expansion doesn’t immediately translate into inflation, but over time the pressure builds.
  • Recent Observations & Commentary
    • Some sources note that M2’s annual growth approaching ~5% is concerning, historically, from an inflation risk standpoint.
    • Finance sites report that M2 reached record highs (i.e. “U.S. M2 money supply hits record high of nearly $22T”) which underscores the magnitude of liquidity in the system.

🧠 Interpretation & What It Suggests

Putting those facts together, here’s how to interpret the signal:

  1. Lagged inflation risk is likely elevated
    The high M2 growth suggests there is more liquidity in the system. If velocity (the rate at which money circulates) picks up or remains stable, that liquidity can translate into demand-pull inflation. Because past studies show lags, inflation pressures may intensify in coming quarters.
  2. If inflation is already sticky, M2 adds fuel
    Given that inflation hasn’t fully normalized and there are ongoing pressures (trade, tariffs, labor costs), the elevated M2 offers more “ammunition” for inflation rather than being easily absorbed.
  3. Not a guarantee — context matters
    The fact that M2 growth is high doesn’t force inflation; other factors like weak demand, high capacity, tight credit, or falling velocity can mute the effect. Indeed, many economists argue that in modern banking/financial systems, the direct linkage between money aggregates and inflation is weaker than classical monetarist theory suggested.
  4. Policy constraints increase
    With M2 high, the Fed has less room to “loosen up” without risking overheating. If inflation surprises upward, the Fed might delay cuts or even tighten further — which creates more tension for markets.

✅ Bottom Line

  • A record-high M2 isn’t inherently bad — it could support growth and asset markets if other conditions are favorable.
  • But it raises a caution flag: the more money there is, the more sensitive markets become to inflation surprises or monetary tightening.
  • In the current climate — sticky inflation, weak labor, geopolitical risks — a high M2 elevates the stakes.

Unemployment Trend and Possibility of Another Rate Cut

Here’s what the latest U.S. unemployment trend looks like, and how markets reacted to the most recent report:

📈 What the Unemployment Data Shows

  • The unemployment rate in August 2025 rose to 4.3%, up from 4.2% in July.
  • Labor force participation and the employment-population ratio have stayed relatively stable month to month, though both are down somewhat over the past year.
  • Nonfarm payrolls showed weak job growth (only ~22,000 jobs added in August), and recent data revisions have cut previous job growth estimates significantly downward.
  • Long-term unemployment (those unemployed 27 weeks or more) is elevated (around 1.9 million), and makes up over 25% of all unemployed workers.

⚙️ How Markets Reacted

  • After the weak jobs/unemployment print, bond markets rallied — short-term Treasury yields dropped, as investors increasingly believe the Fed will need to ease policy.
  • Stocks had a mixed reaction: some gains in rate-sensitive sectors (like tech and growth) because a weaker labor market increases the odds of rate cuts, but also concern in more cyclical sectors over weakening demand.
  • The weak jobs report increased market expectations for future rate cuts from the Fed. Analysts & firms revised forecasts to anticipate easier monetary policy in coming Fed meetings.

🔍 What This Suggests Going Forward

The elevated unemployment rate plus weak job additions suggest that the labor market is cooling. Because the jobs picture is one of the Fed’s two mandates (the other being inflation), these trends push monetary policy toward being more accommodative. Markets are likely to expect:

  • Further rate cuts (but likely gradual, depending on inflation data)
  • Continued cautious investor behavior — sectors dependent on strong demand may be under pressure
  • Increased volatility around economic releases (jobs, inflation) as they’ll be seen as key indicators for Fed actions

Here are recent estimates showing how likely markets think further Fed rate cuts are, based on futures & other data:

📊 Cut Probabilities

Timing / MeetingImplied Probability of 25 bps CutImplied Probability of 50 bps Cut / Larger Cut
September Fed meeting~ 96% that the Fed will cut by 25 bps. (CBS News)~ 4-12%, depending on the source. (Morningstar)
October meeting~ 86% by some futures traders. (Reuters)Smaller chance; often seen as less likely for a bigger move. (Morningstar)
By end of 2025Markets are expecting multiple cuts; total cuts priced in are ~70 bps. (Reuters)But large, back-to-back cuts (50 bps each time) are seen as less likely. (Morningstar)

Here’s a summary of how market expectations (via CME FedWatch and related tools) for Fed rate moves have shifted recently — especially in light of weak jobs + inflation data:

🔍 Recent Probability Shifts

Meeting / TimeframeCurrent ProbabilitiesWhat It Was BeforeNotes on Movement
September 2025 Fed meeting≈ 95-96% chance of a 25 bps cut (Kiplinger)A week or two ago, somewhat lower (mid-80s). (Kiplinger)Increase driven by weak labor data, inflation signs, and revised payroll numbers.
Potential for 50 bps cut in Sept≈ 5-7% (~6.6%) (Kiplinger)Previously nearly zero or very low. (Kiplinger)Seen as unlikely but rising slightly — a “dovish surprise” scenario.
End of 2025 (Dec meeting)~ 75-80% chance that target rate will be ~ 3.50-3.75% (i.e. another cut or two beyond September) (Investing.com)Was lower earlier in the summer; markets have been shifting toward more cuts priced in. (Investing.com)Reflects growing consensus that loosening is likely as economic data cools.

⚙️ Interpretation

  • These shifts show markets rapidly adapting to softer economic signals — especially weak job growth and downward revisions.
  • The nearly-certain expectation of a 25 bps cut in September suggests that new data is no longer enough to shift odds away from that outcome.
  • The possibility of a larger cut (50 bps) has increased slightly, but remains low — viewed more as a potential tail-risk if conditions deteriorate further.
  • By late 2025, markets expect more easing (i.e. one or more additional cuts), though how many and how big depends heavily on inflation and jobs trajectories.