The Fed’s Next Chapter
Kevin Warsh was confirmed as Chairman of the Federal Reserve on May 20, 2026. He is a very bright guy – undergraduate degree from Stanford, law degree from Harvard, and post-graduate work in economics from MIT and Harvard. He has worked at Morgan Stanley, taught at the Stanford School of Business, and served as a lead policy fellow at the Hoover Institute. He had been on the Federal Reserve Board of Governors from 2006 – 2011. Kevin reportedly has a net worth in excess of $100 million; I think it is safe to say Kevin is not taking the job for the money. If there was any doubt in that attestation, his wife is Jane Lauder, granddaughter of Estee Lauder, and purportedly a billionaire. Jane’s father, Ronald Lauder, attended the Wharton School of Business with Donald Trump and has promoted his interest in Greenland, for what it’s worth.
The Fed has a remarkably arcane decision-making process that dates to the Federal Reserve Act of 1913. The main policy-making group is the Federal Open Market Committee (FOMC), which comprises the presidents of the 12 regional Federal Reserve banks as well as the 7 governors (including the Chairman), who reside in Washington, DC. 12 members vote – all 7 governors, the president of the Federal Reserve Bank of New York, and 4 other Reserve Bank presidents. They hold 8 meetings a year, spaced every 6-8 weeks. The Fed has a dual mandate, to keep both inflation and unemployment down. If they keep inflation low, there is a tendency for unemployment to be higher. If they work to lower unemployment, inflation tends to rise. Their attempt to balance the two usually makes more people unhappy than happy.
Kevin Warsh does not believe setting goals is a good idea. He stated at his first news conference in mid-June that inflation was at a moderate level and he will attempt to keep it at a moderate level. Under Chairman Jay Powell, the Fed was very public and open. Almost every day in the Wall Street Journal would be an article or two about some Fed governor speaking about Fed policy.
Looking back at the last 5 Federal Reserve Chairmen shows periods of very high interest rates, very low interest rates, and high and low inflation and unemployment. The following chart shows when the Chairmen arrived, when they departed, inflation when they arrived and when they departed, and the assets on the Fed’s balance sheet for both times.
Source: Bloomberg
You cannot blame or give credit to the Fed for all, or maybe even most, of these statistics. It is a little bit like poker, in that you must play the hand you are dealt. However, the balance sheet growing from $152 billion to $6.7 trillion is pretty frightening.
The graph below shows the Fed Funds rate (black), 2-year Treasury note yield (red), and 10-year Treasury note yield (blue) during the disinflationary period of 1979 to the present. The shaded bars represent recessions:
Source: Bloomberg
We all remember the high inflation / high interest rates of the early 1980s, which were inherited by Chairman Paul Volcker. I do not think there was a more hated person during this period, or a more loved person when we found out that he had broken the back of inflation.
As a side note, you will notice each recession was preceded by an inverted yield curve using the Fed Funds rate and the 10-year Treasury rate. When the Fed Funds rate is higher, the curve is inverted. You can see the black line move above the other two before every recession. The yield curve was inverted from December 2022 through December 2024, with (so far) no recession. Chairman Powell raised rates from 0% to over 5% in a pretty short period of time, so much and so quickly that the consensus was sure a recession would result. Now that 3 years have passed since the Fed last raised rates, the consensus has all but forgotten about the possibility of a recession.
Chairman Warsh was not dealt a great hand. He would like to lower interest rates, but he is fearful of igniting the still-smoldering embers of inflation. He said he has a goal to work on the Fed’s balance sheet, which presumably means to shrink it. I suppose most new Chairmen have said they are going to work on the balance sheet, but somewhere along the way they run into roadblocks.
The new Chairman is a fan of Alan Greenspan, who passed away at the age of 100 a couple weeks ago. Alan was conservative and a devotee of Ayn Rand. Since Alan’s retirement in 2006, the Fed has become more liberal and open. Some feel changing back to a more closed Fed will create more anxiety among investors, resulting in more volatile markets.
The next chart shows the average drawdown (maximum drop) in the S&P 500 during the first 3 months of all the past 12 Chairmen:
The final chart shows the change in the S&P 500 over the 1, 3, 6, and 12 months post- the swearing in of each Fed Chair:
Source: Factset
The bottom line is that we should expect more volatility in the coming months, but hanging on through the rough spots typically pays off in the end. Owning great companies that fare especially well in tough markets makes that even easier to accomplish.
