The Warsh Era: Less Fed, More Market Volatility

The transition to a less interventionist Federal Reserve is likely to produce more market volatility and keep inflation above 3% for the foreseeable future.

• Markets have shifted from pricing rate cuts at the start of 2026 to pricing one or two 25-basis-point hikes over the next 12 to 18 months, potentially taking the federal funds rate from 3.50%-3.75% to around or above 4.00%.
• Since Kevin Warsh became chair in mid-May, the July FOMC meeting left rates unchanged, but three regional bank presidents dissented in favor of an immediate hike; Warsh has also shortened FOMC statements and omitted his own dot-plot projections.
• Five new Fed task forces are reviewing communications, balance-sheet policy, economic data, productivity and jobs, and inflation frameworks, with the aim of making markets rely more on economic data than on Fed guidance.
• The Middle East conflict pushed oil from below $70 to above $110 per barrel before it settled near $80, while U.S. gasoline prices rose from below $3.00 to above $4.50 per gallon before moderating to just under $4.00.
• U.S. GDP grew 2.0% in the first quarter of 2026 and was estimated at 1.5% in the second quarter, while AI-related capital spending, semiconductor demand, Treasury issuance above $1.5 trillion and national debt above $40 trillion add to inflation and dollar risks.
• Ten-year and 30-year Treasury yields rose from 4.15% and 4.85% to 4.65% and 5.20%; six-month Treasury bills yielded about 3.95% and two-year notes about 4.25%, while corporate bonds offered little additional yield over Treasuries.

Takeaway: The author expects rates to remain unchanged for six to twelve months but sees a year-end hike as possible, so bond portfolios should favor high-quality two- to five-year maturities, tax-efficient municipal bonds where appropriate, and shorter duration while locking in yields of at least 4%.