The markets are viewing Kevin Warsh's Fed plans as credible, reflected in a sharply flatter yield curve since last week’s meeting. After the FOMC held rates in place for the fourth consecutive meeting, Warsh wasted no time laying out his proposed changes for the nation's central bank. Among those plans were a series of five task forces aimed at addressing the Fed's communication strategy, balance sheet policy, data sources, labor market dynamics and the committee’s inflation framework.

Relative to his predecessor, Jerome Powell, Warsh gave a shortened speech and set the expectation that Fed communications would be fewer and farther between than years past. He even omitted his own dot from the dot plot in this meeting’s Summary of Economic Projections (SEP). Warsh set the expectation for limited forward guidance in the future, in addition to fewer press conferences and public speaking engagements for FOMC members. Either way, Warsh set a new precedent for the FOMC and what we can expect going forward. To date, markets appear to buy what Warsh is selling and the recent shift in the yield curve reflects that they expect him to turn the table on inflation going forward.

According to Bank of America, stubbornly high inflation and the hawkish tone from Warsh will lead the FOMC to hike rates three times this year. That comes from a note released last week in which BofA economists reversed their recent position that the Fed would hold rates steady this year. BofA economist Aditya Bhave commented, "The Fed's inflation problem has gotten unambiguously worse. The Fed was willing to look through tariffs, but it is losing patience after the latest round of supply shocks. Also, housing-driven disinflation has now mostly run its course, while other core services remain very sticky." If the three cuts expected by BofA were to transpire, it would effectively unwind the three "cautionary" cuts the Fed did last year to support the labor market. Interest rate futures have a full 25 bp hike priced in for the October Fed meeting.

Speaking with NBC on Wednesday, Treasury Secretary Scott Bessent expressed confidence in Warsh's ability to deliver on his commitment to lower inflation. Regarding recent Treasury market volatility, Bessent said President Trump understands that "bond markets have taken out more governments than howitzers," and that Trump would give Warsh space to do his job. He also expects inflation to begin to return to the Fed's 2% target now that we're "on the other side of this conflict."

Outside of Warsh’s new tenure, the war with Iran has made positive headlines in the last two weeks with negotiations moving towards a diplomatic resolution. A formal memorandum of understanding was signed on June 19 between the U.S. and Iran, which reduced hostilities and allowed traffic to resume through the Strait of Hormuz. The 14-point memorandum began a 60-day negotiating window covering Iran’s nuclear program, sanctions relief and permanent access to the Strait, through which regular traffic has largely resumed. Oil prices responded by falling below $75/barrel, about 40% below their recent peak.

KEY INDICATORS THIS WEEK

CORE PCE – 3.4% YoY 
Next week – Jobs week!