Warsh's Untenable Position: Rate Hikes vs Political Pressure

Kevin Warsh, the Federal Reserve chair, is facing an impossible choice between raising interest rates quickly to combat inflation or slowing down hikes and risking being seen as a partisan shill.

Warsh's dilemma is a result of the current economic situation, which is fragile due to high fuel prices and rising mortgage rates. Hiking rates aggressively could lead to a sharp slowdown in the economy, while not delivering on rate hikes would risk a runaway bear steepener in the market.

The 2s10s spread, which measures the difference between short-term and long-term interest rates, has shrunk inside 20bps last week. This development is crucial for Warsh, as a 2s10s inversion would indicate a recession. However, he can point to the flattener as evidence to support a cautious approach to hikes.

The longer the war drags on, the more untenable Warsh's position will be. His ability to communicate effectively with short-term interest rates (STIRs) is crucial in avoiding a combustible situation. The article suggests that Trump may renew his assault on Jerome Powell and Lisa Cook, or even Warsh himself, if he doesn't deliver on rate hikes.

David Zervos has been hired by Scott Bessent to serve in a 'broad advisory capacity' at Treasury, starting immediately.