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Powell’s latest action…More ‘wait-and-see’ approach…Warsh Fed takes shape…Why the balance sheet is more important than the interest rate
The Federal Reserve concluded its April FOMC meeting today, voting to keep the benchmark federal funds rate steady at 3.5%-3.75%.
This marks the third straight meeting in which the commission has chosen to remain as is, after three consecutive reductions to close in 2025.
The wait was completely predictable. What was not entirely unexpected was how divided the committee was.
The vote was split 8-4, the largest number of dissenters at a Fed meeting since October 1992.
To be clear, three of the four opponents – Cleveland Fed President Beth Hammack, Minneapolis Fed President Neel Kashkari, and Dallas Fed President Lori Logan – have agreed to hold interest rates. Their objection was to the “accommodative bias” language retained in the statement, specifically the phrase referring to “additional adjustments to the target range,” which implied that the next move was likely to be bearish rather than bullish. They don’t want to point it out anymore.
This should not be confused with price preference to lift. As Powell said in his press conference in response to a question on this topic: “No one is calling for raising interest rates.”
A fourth dissenter, Fed Governor Stephen Meiran, went the other way, calling for a quarter-point cut today.
So, the main disagreement within the Fed is not about the immediate decision. It’s about the position the central bank should expect heading into an environment where the inflation picture remains really ambiguous.
On this front, Powell was frank about the reason behind the murky inflation picture: the conflict in the Middle East
The FOMC statement acknowledged that the war “contributes to a high level of uncertainty about the economic outlook,” while linking high inflation “to the recent increase in global energy prices.”
Powell’s main point about this in the press conference was clear and straightforward – no one knows how long this struggle will last, so the Fed cannot confidently model what will happen to energy prices and associated inflation.
This led to Powell’s usual tap dancing routine with the press. For example, when asked about rising oil prices and the risk of higher core inflation readings, Powell said:
We’ll just have to wait and see.
But he said inflation “is really a form of malpractice,” although it is too early to see the full extent of it.
For doves who want to lower interest rates, Powell did not offer much encouragement. He said the energy shock “has not peaked yet,” and that the Fed would like to see the back of it before it even considers cutting interest rates.
Overall, as usual, “wait and see” was Powell’s takeaway from interest rate policy in light of all the uncertainty today:
We are in a good place to wait and let things develop.
As for Powell himself, he confirmed that he will remain on the Board of Governors for a period “to be determined,” to serve his term as governor, which continues until January 2028.
But he was clear in saying that he would not be a “shadow chair”:
I plan to keep a low profile as governor.
There is only one Chairman of the Federal Reserve. When Kevin Warsh is confirmed and sworn in, he will be that president.
Overall, there was no major volatility today – and the market seems to have agreed with that.
Shares were mixed but largely held steady, with most of Wall Street’s attention focused on the Magnificent Seven’s earnings due after the bell.
We will report on these tomorrow.
Talk about Kevin Warsh is one step closer to becoming the new Federal Reserve Chairman today
As Powell prepared for his afternoon news conference, the Senate Banking Committee was voting on his replacement.
In a vote along party lines, the committee nominated Warsh to be the new head of the Federal Reserve. The full vote in the Senate is expected to take place in the week of May 11.
So who is Warsh, and what kind of Fed would he run?
Warsh served on the Fed’s Board of Governors from 2006 to 2011. His tenure overlapped with the 2008 financial crisis, during which he helped manage the central bank’s response under then-Chairman Ben Bernanke.
During that period, he gained a reputation as an interest rate hawk – someone who generally favors higher interest rates as a tool for maintaining price stability.
Since he left the Fed, he has become one of its harshest critics. He was an early supporter of bond-buying programs that expanded the Fed’s balance sheet during the financial crisis, but he became increasingly skeptical of the practice over time—and eventually resigned over the central bank’s continued purchases.
President Donald Trump nominated him in hopes that he would lower interest rates, but the president may not get what he bargained for.
At his confirmation hearing last week, Warsh tried to thread a difficult needle. On the one hand, he expressed support for the independence of the Fed:
The independence of monetary policy is essential. Monetary policy makers must act in the interest of the nation.
On the other hand, he defended the right of elected officials to influence interest rates — a position that Democrats have defended as a cover for political interference.
When pressed directly by Senator Elizabeth Warren about whether he would be a “Trump puppet” at the Fed, Warsh responded:
I am honored that the President has nominated me for this position, and I will serve as an independent representative if confirmed as Chairman of the Federal Reserve.
Whether this independence will withstand political pressure will be the central question of the Wershe era.
Wershe is not the pure hawk that his reputation suggests. He favors lower interest rates, even though that is coupled with a significant reduction in the Fed’s balance sheet.
However, this is the part of Warsh’s story that has missed most of the financial coverage. This matters – directly – to your mortgage, borrowing costs, and your investment portfolio.
Let’s talk about why…
Possibility of tightening stealth under Warsh
Most of the workshop coverage focused on one question.
Will he cut the federal funds rate sooner than Powell would have done, or later?
While this question is important in the short term, there is another question that has a much greater impact on the long-term outlook.
The most important issue is Warsh’s interest in shrinking the Fed’s balance sheet — a $6.7 trillion portfolio of Treasuries and mortgage-backed securities, which has swelled from less than $900 billion before the 2008 financial crisis.
Think about what this massive expansion has already done…
When the Fed buys bonds, it floods the financial system with cash. All that money had to go somewhere – and it did.
It flowed into stocks, real estate, corporate debt and venture capital. It lowered long-term interest rates to a level well below what would be set by the free market. And make borrowing artificially cheap for businesses, homebuyers, and the federal government alike.
In short, this has inflated the price of almost every asset you can name.
That was the point – at least in the beginning. In the depths of the 2008 crisis and again during the coronavirus crisis, the Fed used its balance sheet as a contingency tool to prevent financial collapse.
The problem is that the emergency never fully ended, at least not on the Fed’s books. The balance sheet remained bloated long after the crisis ended.
But more than a decade of artificially suppressed interest rates has consequences: a housing market that is priced out of reach for first-time buyers… and the stock market trading at the second-highest CAPE in more than 140 years… and a federal debt today that exceeds $39 trillion, financed for years at rates that never reflected the true cost of borrowing — a bill that becomes far more expensive to service the moment that artificial support is removed.
Warsh says this distortion remains ingrained in the system. At $6.7 trillion, the Fed’s footprint in the bond market remains massive.
But if we remove the Fed as a buyer of perpetual bonds, demand would likely decline. This may mean that the Treasury will have to offer higher yields to attract other buyers. Track mortgage rates. Track corporate borrowing costs. The long end of the curve is facing upward pressure – not because of anything Warsh does with the federal funds rate, but because the artificial support is being withdrawn.
This is the mechanical effect of removing a major, price-insensitive buyer from the market – regardless of the intentions of policymakers.
That’s why the balance sheet story is bigger than the interest rate story. The federal funds rate is the number everyone watches. But the balance sheet is the lever that drives the prices everyone actually pays.
To be clear, this is not necessarily Warsh’s goal. His argument is that, if implemented credibly, this combination could actually lower inflation expectations and allow long-term interest rates to stabilize or even fall.
However, the “if” and “could” do a lot of the work there.
Warsh was clear about his intentions
On the Larry Kudlow Show last summer, he said:
You can reduce that balance sheet by $2 trillion over time, in coordination with the Secretary of the Treasury.
This could be a significant reduction in interest rates, and what it will then do is stimulate the real economy, where things are somewhat more difficult, and ultimately the financial markets will be fine.
Let’s make sure we’re on the same page about this…
When the Fed lowers interest rates, it eases economic conditions. But when it shrinks its balance sheet, it tightens constraints – because withdrawing cash from the system has the same fundamental effect of making it more expensive to borrow that cash.
Warsh’s strategy is to do both simultaneously, not to explicitly steepen the curve, but to normalize how it is adjusted.
Lowering the federal funds rate to give the economy some relief from short-term borrowing costs — and at the same time, shrinking the balance sheet and withdrawing liquidity that has been artificially suppressing long-term returns for more than a decade.
Expected result? The short end comes down. But the long end faces upward pressure – even if Warsh hopes it won’t rise significantly. The curve risks steepening.
Regardless, from a political standpoint, it would be a win for Lorsch – he can tell the White House that he cut interest rates, and he can tell inflation hawks that he kept public financial conditions tight.
But if market mechanisms outweigh political intentions, the net impact on the real economy could be more severe than lowering key interest rates suggests.
Whether or not the federal funds rate is cut in the second half of 2026, the Warsh-led push to reduce the balance sheet will likely exert independent upward pressure on longer-term yields.
This means mortgage rates remain high… corporate borrowing costs remain high… and valuation calculations continue Growth stocks Staying under pressure — all without Warsh touching the federal funds rate index once.
Bottom line: The market is watching the interest rate decision — but it should be watching the balance sheet, because this is where Warsh’s intentions and market realities are likely to diverge.
We will continue to track this as the Warsh era begins.
I wish you a good evening,
Jeff Remsburg
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