Crude (WTI July contract) prices traded above $104 in early Wednesday trading. Ten-year Treasury yields were at 4.68%, up 12 bps w-t-d to the high yield since January 2025, while long-bond yields reached 5.20% (up 13bps w-t-d) – the high back to July 2007. Japanese 30-year yields traded intraday Monday to a record 4.19%. UK yields traded Monday up to 5.86%, the highest yield since May 1998. At Tuesday’s lows, the MAG7 Index was down 2.5% w-t-d.
Yet another well-timed intervention: “Trump Says US in ‘Final Stages” With Iran.” Crude closed Wednesday trading at $98.26, down almost 6% from earlier trading highs. The MAG7 Index traded up 1.4% from intraday lows, ending the session 1.3% higher. The Nasdaq100 jumped 1.7% Wednesday, with the Semiconductors surging 4.5%. The S&P500 advanced 1.1%, as the small cap Russell 2000 jumped 2.6%. The Goldman Sachs most short index advanced 3.2%. Ten-year Treasury yields ended the week at 4.56%, 12 bps below Wednesday’s trading high.
May 22 – CBS News (James LaPorta, Jennifer Jacobs and Margaret Brennan): “The Trump administration was preparing Friday for a fresh round of military strikes against Iran, according to sources with direct knowledge of the planning, even as diplomacy continued. No final decision on strikes had been reached as of Friday afternoon. ‘Circumstances pertaining to Government’ are keeping President Trump from attending his son Donald Trump Jr.’s wedding this weekend… The president had planned to spend Memorial Day weekend at his golf property in New Jersey but will now return to the White House. Some members of the U.S. military and intelligence community canceled their plans for the Memorial Day weekend in anticipation of possible strikes, several sources said.”
May 22 – Axios (Barak Ravid): “President Trump convened a meeting with his senior national security team on the war with Iran on Friday morning, two U.S. officials told Axios. Trump is seriously considering launching new strikes against Iran barring a last-minute breakthrough in negotiations, sources who have spoken directly with the president say. Trump’s Iran meeting took place as the head of the Pakistani military, Field Marshal Asim Munir, traveled to Tehran in an apparent eleventh-hour effort to bridge the gaps and prevent a resumption of the war.”
May 22 – New York Times (David E. Sanger, Eric Schmitt, Tyler Pager, Jonathan Swan and Julian E. Barnes): “And after weeks of declaring that an agreement was near, and then that the Iranians were ‘dangling’ him, negotiations seem to be at a standstill. Mr. Trump announced on Friday that he was skipping the wedding this weekend of his son and namesake… because of ‘circumstances pertaining to the Government, and my love of the United States of America.’ For Mr. Trump, the risks of resuming combat operations appear far greater now than they were in late February, when he ordered the first strikes in Operation Epic Fury, in coordination with Israel. Now he has to deal with the reality that after five weeks of war and six weeks of cease-fire, he has failed to force Iran’s leaders to relent.”
Meanwhile, we have a new Fed Chair.
“Honestly, I really mean this. This is not said in any other way. I want Kevin to be totally independent. I want him to be independent and just do a great job. Don’t look at me. Don’t look at anybody. Do your own thing, and do a great job.” President Trump, at Kevin Warsh’s Friday swearing in ceremony.
A few hours later…
May 22 – Bloomberg (Sam Kim): “‘We’re going to get it down very quickly,’ President Trump says at a rally in the state of New York, referring to interest rates. Trump talks about a White House ceremony earlier in the day to swear in Kevin Warsh as Federal Reserve chairman. Everybody will be happy ‘if you get the interest rate down,’ he says…”
“I now have a great head of the Fed in Warsh.” “He’s going to be great.”
As my preferred candidate to succeed Chair Yellen, I titled a CBB back in October 2017, “Kevin Warsh to Lead Fed in a New Direction.” “He is viewed as the reformer candidate – somewhat of a disrupter that might shake things up a bit. From my perspective, he is more the outcast traditionalist in an age of monetary radicalism. Fed governor Warsh was the most outspoken member of the Fed’s inner circle arguing against Bernanke’s radical monetary doctrine. Importantly, Warsh is not an inflationist – and for this he is on the receiving end of criticism from the left as well as the right. Willing to stand tall against the powerful consensus view, Warsh recognizes the great risks that come with monetary inflation.”
I ponder the size of pandemic QE had it been a Warsh Federal Reserve. I doubt he would have managed the crisis much differently than Powell. Perhaps he would not have restarted QE as early in 2019, and he might have moved earlier to begin drawing down the Fed’s bloated balance sheet.
The world has changed so momentously since Powell’s swearing in. Incredibly, Treasury debt has almost doubled (90%) to surpass $37 TN. The Fed’s balance sheet is 50% larger. Money Market Fund Assets have inflated from $2.8 TN to $7.8 TN. System “repo” assets have more than doubled (115%) to $8.2 TN. Broker/Dealer Assets have ballooned 76% to $6.3 TN. Hedge fund “repo” borrowings have inflated from $700 billion to $3.4 TN, as long Treasury holdings surged from $700 billion to $2.4 TN. The AI mania/arms race has made some headway, with the MAG7 Index having inflated more than 1,100%.
Judy Shelton’s Friday evening WSJ opinion piece, “Kevin Warsh Can Tame Inflation Without Higher Rates,” evoked memories.
“Reforms under Mr. Warsh that reduce the Fed’s outsize presence in financial markets and reinforce free-market price signals will help wean monetary-policy makers off seeking to manage economic performance through artificially induced interest rates. One result of the central bank’s allowing market forces to determine the cost of capital would be that the Fed has to give up its predilection for imposing restrictive interest rates to squelch inflationary pressures-curtailing demand by suppressing economic growth. In this way, pro-market reform would mean over time interest rates lower than they otherwise would be.”
Chair Powell surely had hopes to “reduce the Fed’s outsize presence in financial markets.” Every new head of a central bank has a plan – until they’re smacked in the face by financial crisis. Judy Shelton suggests that resolving some of our nation’s most intractable problems is simply a matter of adopting free-market reforms and allowing the resulting supply-side boom to whip inflation now and balance the federal budget. Haven’t we followed a similar “reform” playbook a few times over recent decades?
Unfortunately, there will be no growing our way out of today’s pickle. In theory, economies can inflate away over-indebtedness. In reality, efforts to inflate out of Bubbles ensure only greater and more destructive Bubble excess. And it is fundamental to my analysis that prolonging “Terminal Phase Excess” courts disaster.
The Trump administration is pursuing every avenue to bolster late-cycle excess and prolong history’s greatest Bubble. Overheating risks are high and rising. The Iran war has significantly bolstered already powerful inflationary pressures. And, importantly, bond markets now recognize that they are on the losing end of inflationary policymaking – the sucker at the table.
Is Kevin Warsh “independent”? Things would be relatively straightforward for the old Warsh. He would focus on the Fed’s principal responsibility for maintaining price stability; invoke the legacy of Paul Volcker; and prepare to marshal the FOMC in the direction of tighter monetary policy.
Warsh: “To fulfill this mission, I will lead a reform-oriented Federal Reserve, learning from past successes and mistakes, both escaping static frameworks and models, and upholding clear standards of integrity and performance.”
“While I’m not naive about the challenges we face, I believe, Mr. President, these years can bring unmatched prosperity that will raise living standards for Americans from all walks of life, and the Fed has something to do with it.”
Kevin Warsh took the opportunity to praise his “idol” Alan Greenspan. And it was the free-market ideologue, “The Maestro,” that mastered the art of harnessing market speculative impulses to achieve his policy objectives. Just provide “free” markets a little needed boost on occasion to ensure righteous outcomes. It was Greenspan’s aggressive monetary easing, yield curve manipulation, and general “asymmetrical” policy approach that promoted leveraged speculation and booming Wall Street finance, which evolved over decades into history’s greatest global financial Bubble.
Starting in the mid-nineties, Greenspan argued that technology-driven productivity gains allowed the economy to grow at a faster “speed limit” without triggering inflation. In 1999, near the peak of the Bubble he so readily accommodated, it was that “something special has happened to the American economy.”
Back to Shelton: “By reforming how the Fed models the effect of its interest-rate decisions on the economy, discarding Keynesian theories that bristle at low unemployment and high growth, Mr. Warsh can align monetary policy with the Trump administration’s goal of higher economic output to increase prosperity and to reduce inflationary pressures.”
Back on February 5, 2018, Jay Powell took his oath and was sworn in the Federal Reserve’s boardroom, administered by vice chairman Randal Quarles.
It was a revealing backdrop Friday for Warsh festivities: A packed East Room of the White House, with the oath administered by Supreme Court Justice Clarence Thomas. Warsh’s long-time friend Justice Brett Kavanaugh was in attendance, along with Justice Samuel Alito, former vice president Dan Quayle, former Secretary of State Condoleezza Rice, and former House Speaker Kevin McCarthy.
I immediately miss Jay Powell’s non-ideological, apolitical approach to managing the FOMC. Fed independence has already been compromised. And it’s difficult to see how the Warsh Fed avoids the political and ideological fractures that have taken hold virtually everywhere. For half of the committee, notions of AI-induced productivity supporting lower rates and supply-side stimulus curbing inflation will be tough sells. A deeply divided Fed is an unpredictable central bank institution.
In Warsh’s confirmation hearing, he chided Federal Reserve “mission creep.” “…The central bank, an independent body, should not be adopting a set of policies that have that kind of distributional consequence.” “Inflation is the Fed’s choice.”
Making difficult decisions necessary to safeguard price stability for our frustrated nation will be the Warsh Fed’s choice. While Kevin Warsh was relishing White House fanfare and ceremony, one of the committee’s ardent doves announced a responsible change in his inflation view.
May 22 – Bloomberg (Enda Curran): “Federal Reserve Governor Christopher Waller said he supports making clear the central bank’s next interest-rate move is just as likely to be an increase as a cut, as the energy shock from the Iran war pushes up prices. Waller said his current position is to be patient in holding rates until the war’s impact is clearer, but he warned on Friday that he wouldn’t rule out a future rate hike if inflation doesn’t start to slow soon. ‘Inflation is not headed in the right direction,’ Waller said Friday in a speech titled Policy Risks Have Changed… ‘I would support removing the ‘easing bias’ language in our policy statement to make it clear that a rate cut is no more likely in the future than a rate increase.’ Waller said the oil shock could dissipate soon, but, he added, ‘I can no longer rule out rate hikes further down the road if inflation does not abate soon.’”
While on the subject of Fed doves, it’s worth highlighting comments by Trump’s former chair of the Council of Economic Advisers and Fed governor appointee, Stephen Miran (Bloomberg TV 5/14/26)
Bloomberg’s Lisa Abramowicz: “One thing you’ve been known for – a hallmark of your time on the Fed – was that you voted to cut rates at least once at every single meeting. Do you think that that still holds, even though in the short-term it does seem like the inflationary shock is overwhelming potential structural changes that could lead to disinflation?”
Stephen Miran: “I do. And I think this is maybe one of the biggest differences between me and a lot of other folks, is that I take very seriously the idea of monetary policy lags – very, very seriously. Monetary policy doesn’t hit the economy right now. If we changed interest rates today, it wouldn’t flow through into the economy until 12 to 18 months from now. There is some disagreement over exactly how long those lags are, but I think 12 to 18 is the consensus view. And, therefore, for any shock that’s in the economy today, you can’t think about what the effect in the next few months is. You need to think of the effect 12 to 18 months out. So, if oil goes higher, it’s a supply shock. The Strait of Hormuz is closed, right. That’s going to boost the oil price today and with it a bunch of other stuff that’s very tightly tied to energy prices, like airfares. That’s going to go higher very quickly, within the course of a few months. And we’ve been living through that. And that is very real inflation. But it is not inflation that monetary policy can affect. Monetary policy can affect 12 to 18 months from now. So, there’s got to be a reason you think airfares and oil prices are going to be moving higher in the summer of 2027 and the fall of 2027, not the summer and fall of 2026. And so, it’s those lags that really should be driving where you think forward monetary policy should be. And that’s a lot of what I’ve tried to hone into when thinking about population growth and deregulation – and saying that the traditional view that we should look through an oil shock should prevail. This is very vanilla, basic, traditional monetary policy.”
Lisa: “Part of the problem is that the market doesn’t agree, at least not in terms of where longer-dated bonds are trading and where yields are shifting higher even as the front end stays where it is…”
Miran: “So, the market not agreeing is in part a hall of mirrors issue. Because if the Fed says we’re very backward looking and inflation over the past 12 months is going to determine policy that affects 12 to 18 months from now – meaning the economy in 2027 is affected by data in 2025 in that world. It’s very, very backward looking. If that’s how the Fed communicates that that’s how it’s setting policy, then the market is going to start to reflect that. And so the market reflecting a lack of interest rate cuts – right – is in part because the Fed is telling them we’re backward looking. So that’s going to create a self-reinforcement problem.”
I assume Chair Warsh doesn’t share Stephen Miran’s deeply flawed analytical framework. It was Alan Greenspan who first realized that financial conditions could be immediately loosened with a mere terse comment. Just a dovish utterance would spark “risk on” speculation, leveraging, looser conditions, higher market prices, and economic activity.
More recently, the Powell “pivot” spurred a swift surge in speculative leverage and looser conditions. Miran’s view that the Fed should look through the war’s inflation shock and reduce rates today for a better 2027 outcome is irresponsible. His analysis that bond yields have moved higher because of the Fed’s misguided “backward looking” market signaling is misguided.
Ten-year Treasury yields have jumped 90 bps since the Fed began its 175 bps rate-cutting cycle in September 2024. Yields are up significantly because the Fed failed to tighten conditions sufficiently to quash inflationary pressures. And the longer loose conditions accommodate inflationary biases, the more resistance deeply entrenched inflationary forces will be to future tightening measures.
Reform can wait. “Mission creep” and Fed communications are not pressing issues. It is inflation that has emerged as the predominant issue of this era. “Bessent: Warsh to do Right Thing for Inflation, Growth.” The right thing would be to err on the side of reining in inflation. At this point, necessary tightening measures would cause major upheaval. Allowing inflation and Bubble excess to spiral out of control risks catastrophe. And when it comes to reform, the Fed should shift its analytical focus to financial conditions and Credit. I’m not optimistic. Optimism is not enveloping global bond markets.
May 18 – Axios (Neil Irwin and Courtenay Brown): “Kevin Warsh hasn’t even been sworn in as leader of the Federal Reserve yet, and his first great test has already arrived. Global bond markets are sending borrowing costs markedly higher in this era of energy supply disruptions, AI-fueled demand for capital and massive fiscal deficits. The yield on 30-year U.S. Treasury bonds has surged to 5.11%, its highest level since 2007… It sets up an environment where the Fed may well need to prevent inflation expectations — as reflected in bond traders’ bets — from coming unmoored. It’s a paradox of monetary policy: Sometimes, the only solution for higher long-term interest rates is higher short-term interest rates. Warsh has spent years criticizing the Fed for letting inflation run too hot for too long. Now, he’s inheriting a bond market that’s pricing in exactly that scenario.”
May 19 – Axios (Courtenay Brown): “The global economy faces the types of massive imbalances that preceded previous crises… and it’s not yet clear how this debt cycle will end. The last four decades of economic turbulence trace back to a similar underlying issue, that the world’s biggest economies are chronically out of sync, former top International Monetary Fund official Gita Gopinath argued… She spoke at the Atlanta Federal Reserve Bank’s annual financial markets conference… Gopinath pointed to three major eras of global imbalances: the U.S.-Japan tensions of the 1980s, which culminated in the Plaza Accord; the buildup to the 2008 financial crisis; and today’s standoff between the U.S. and surplus economies like China. ‘How will this one end compared to the previous two?’ Gopinath asked.”
May 19 – Financial Times (Joachim Klement): “In December 1996, Federal Reserve chair Alan Greenspan characterised the boom in technology, media and telecom stocks as showing signs of ‘irrational exuberance’. Almost 30 years later, we can say the same about the AI boom. But while there are similarities between the current tech boom and the one a generation ago, there is an important difference. One aspect of today’s boom is already much larger than the TMT bubble ever was. In 2025, US businesses invested almost $1.5tn in IT equipment and software. At the peak of the TMT bubble, it was $466bn or $829bn when adjusted for inflation. Indeed, the US economy is growing solely because of the tech boom. I calculate that over the past four quarters, 93% of US GDP growth was explained by tech investments. Even at the peak of the TMT bubble, it barely reached 60%.”
Categories: Doug Noland