Warsh Sounds Alarm: US Financial Conditions Mirror 2007

Financial conditions in the US are eerily similar to those of 2007, according to economist Kevin Warsh. Speaking in 2026, Warsh pointed out that markets are supported by historically elevated leverage and heavy foreign participation, as well as unusually tight credit spreads. This situation leaves the market vulnerable if liquidity begins to reverse.

Warsh's warning is not new, he sounded the alarm about excessive liquidity, leverage, and investor complacency in 2007. Now, he argues that broad financial conditions remain far from restrictive, despite strains in selected sectors.

The Federal Reserve may focus on balance-sheet and transmission mechanisms to tighten financial conditions beyond changes in the policy rate, according to analysts. They believe this could be the Fed's next policy phase, and it remains bearish on broad US equities and corporate credit while bullish on volatility.