- Warsh’s monetarist leanings suggest the Fed’s focus may shift from managing the price of money via rates to controlling the supply of money through a smaller balance sheet
- Unlike the post-GFC era, today’s excess reserves sit alongside price-insensitive borrowers — the US government and AI hyperscalers — raising the risk that liquidity feeds inflation
- A maturity-matching strategy could reverse Operation Twist by reinvesting maturing Treasuries into front-end bills, increasing long-end supply and steepening the yield curve
- Markets may be right on Warsh’s anti-inflation resolve but wrong on the transmission channel, with quantitative tightening potentially doing more of the work than policy-rate hikes
- Portfolio duration should stay disciplined: avoid ultra-longs, keep blended duration around 5-7 years, and favour short-duration IG credit if front-end hike pricing proves excessive
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Flattening or steepening? Kevin Warsh in his first meeting as Fed Chair vowed to fight inflation and deliver price stability, and the markets rewarded him with credibility – short-end rates rose in anticipation of the hawkish pivot, while long-end rates declined on his resolve. Does curve flattening under the new Warsh regime favour a pivot to longer duration portfolios? We caution against this and propose that steepening risks are still very much on the cards given Warsh’s long-held views of monetary policy; investors should not be lulled into duration complacency with this recent yield curve “head fake”.
Warsh’s core monetarist views of QE and the Fed balance sheet are namely (a) excessive money supply stokes inflation, and that (b) QE encourages extravagant government spending by effectively monetising their debt. We think it best to quote him at this point on the matter:
"I think inflation comes about when the government prints too much - by which I mean the central bank and broadly speaking the government spends too much."
- Kevin Warsh, during his Apr 2026 Senate confirmation hearing
Massive rounds of QE post-GFC did not raise prices. “But wait, Warsh is wrong” quips the sharp-eyed observer. “QE did not stoke inflation after the GFC.” While it is true that y/y US Core PCE averaged a paltry c.1.5% in the 2008 to 2014 period where the Fed was conducting QE, one must be cognisant of the limitations of monetary transmission in that era to understand why. QE created a regime of excess bank reserves, which increased the ability of banks to lend on credit – but not the willingness. The post-GFC era was one of low willingness to both lend and borrow these excess reserves, due to (a) stringent bank capital and leverage ratio requirements restricting the risk-appetite of lenders, while (b) borrowers were unwilling to incur more debt having experienced a near financial meltdown of the global economy and were conversely paying down debt. Therefore, much of these excess reserves remained unborrowed; the increase in base money supply via QE did not translate to broad money supply growth in the real economy.
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