Warsh's Policy Approach Gets a Boost from Market Skeptics

Nancy Tengler, CIO of Laffer Tengler Investments, believes that market concerns about Kevin Warsh's policy approach as Federal Reserve Chairman are unfounded. In her view, Warsh is clear and transparent in his plan to tighten financial conditions through balance sheet reduction.

Tengler notes that the Fed has discussed how much accommodation comes from the balance sheet expansion, which leads to goods inflation about a year later. Shrinking the balance sheet is crucial for containing inflation.

The recent Treasury yield curve increase in the 30-year bond has been misinterpreted by some as a cause for concern. However, Tengler points out that yields on the important part of the curve (2s/10s) have actually come down recently.

Tengler suggests that Warsh might be allowing the market to steepen the yield curve on its own, a tactic reminiscent of Alan Greenspan's approach. She argues that robust stock returns can coexist with higher interest rates, citing the 1990s as an example where productivity-driven growth led to high equity returns despite a 10-year Treasury average of 6.66%.

Tengler concludes that Warsh is on the right track and believes that his approach will ultimately lead to improved economic outcomes.