"F" Grade for Fed Chairman Warsh at June FOMC Meeting

By Victor Sperandeo with the Curmudgeon

Disclaimer: The views and opinions expressed herein are exclusively those of Victor Sperandeo. The Curmudgeon provides factual information in Notes and the End Quote explanation.

Executive Summary:

Since 2008, Federal Reserve monetary policy has produced negative economic and financial results for the average U.S. household after inflation. Yet it materially benefited the top 10% of asset holders through equity and real estate market price appreciation and liquidity expansion.

Following the first FOMC meeting under Chairman Kevin Warsh on June 17th, it seems likely this inequality divergence will continue.

Victor's prior investment position reflected a constructive view of Warsh’s implied Fed policy framework. He established a leveraged long in 5-Year U.S. Treasury note futures, partially based on Warsh's emphasis on Fed balance sheet reduction and a macro thesis centered on economic deceleration and lower interest rates. Victor also believed the economy would slow and interest rates would decline.

On Warsh so far, Victor says, "I am dead wrong! His first meeting gets an “F” grade in my view. What he said he would do, and implied are 180 degrees apart."

Curmudgeon Note: The FOMC policy statement released on June 17th contained only 130 words. There was no forward guidance provided. Warsh emphasized a data dependent approach over market-based speculation on the future direction of interest rates.

Fed Policy Assessment - Credibility Gap:

Warsh’s first meeting represents, in Victor's view, a significant policy and communication failure. His prior public statements emphasized gradual balance sheet reduction to constrain money supply (M2) growth, paired with lower Fed Funds rates to offset tightening liquidity—an approach broadly consistent with Milton Friedman's monetary principles (see End Quote below).

Instead, Warsh avoided directly addressing Fed balance sheet policy and deferred to the creation of multiple “task forces.” This introduces uncertainty and signals a shift away from rules-based monetary policy toward a more discretionary and potentially politicized process.

Simultaneously, Warsh's strong emphasis on achieving the 2.0% inflation target—without reconciling conflicting inflation signals—led markets to perceive a hawkish Fed rate path with a bias toward tightening. This stands in contrast to earlier expectations this year of one or two Fed rate cuts.

The shift in expectations is reflected in market-based probabilities after the June Fed meeting:

· Kalshi (prediction market) traders see greater than 50% odds the Fed will hike rates this year!

· The CME Fed Watch tool now shows an 89.6% probability of one or more rate hikes by the end of 2026. There's a 0% probability of a rate cut!

Inflation Signals vs. Policy Bias:

Current cross-asset signals do not support a tightening bias, in my opinion:

· Truflation YoY: 1.85%

· CPI: 4.25%

· Commodities: Dow Jones Commodity Index is down 8.4% over nine consecutive trading sessions

· Precious metals: Weak pricing, consistent with disinflationary expectations

· Inflation-linked bonds: 10-year TIPS break evens are declining

· Vanguard Extended Duration Treasury Index ETF (EDV) is up 6.96% in the last month (Source: Yahoo Finance)

Collectively, these indicators suggest moderating inflation expectations and increasing recession probability. The long end of the Treasury curve, particularly 30-year duration, is effectively signaling an economic slowdown.

Fed Policy Process and Governance Risk:

The reliance on “task forces” rather than direct policy articulation raises concerns about governance and accountability. The Federal Reserve already employs extensive internal expertise, including hundreds of PhD economists. Delegating core policy direction risks diluting responsibility and introduces political optionality.

This approach also creates a disconnect between stated objectives and actionable policy, undermining forward guidance and increasing volatility in rate expectations.

Political Overlay and Economic Impact:

The current policy trajectory appears increasingly influenced by political considerations rather than purely macroeconomic fundamentals. In light of President Donald Trump's “TACO” nick name, Victor's designation for Warsh is “WACO” - “Warsh Always Chickens Out.”

The reason the Fed always gets monetary policy wrong is POLITICS -not knowledge.

As former European Commission President (2014-2019) Jean-Claude Juncker stated:

“We all know what to do, but we don’t know how to get re-elected once we have done it.”

With 134 days until mid-term elections, Fed policy ambiguity and a perceived hawkish pivot risk tightening financial conditions at a fragile point in the economic cycle. A sustained higher-rate environment would disproportionately impact consumers and small businesses, with second-order effects on economic growth and credit conditions.

Fiscal Backdrop and Structural Pressures:

The broader macro environment remains dominated by persistent fiscal spending expansion and huge federal budget deficits:

· Federal spending: $7.2 trillion annually (~$19.7 billion per day)

· Federal budget deficit in 2026 =$1.9 trillion to $2.065 trillion

· Deficits as % of GDP:

o 2020: -15%

o 2021: -12.4%

o 2022: -5.5%

o 2023: -6.3%

o 2024: -6.4%

o 2025: -6.4%

o 2026 YTD: ~-5.9% (1.25 trillion deficit as of May 31st)

o Average: -8.58%

A significant portion of these budget deficits have been monetized, contributing to prior inflation cycles and continuing to anchor long-term macro risks that have been largely ignored.

Investment Implications and Market Positioning:

If the U.S. economy transitions into a slowdown or recessionary phase, current market signals favor defensive and yield-oriented positioning.

A potential investment allocation might include:

· Utilities and electricity infrastructure: Beneficiaries of structural AI-driven power demand growth, with regulated returns and defensive characteristics.

· Water infrastructure equities: Complementary exposure with stable cash flows and pricing power.

· Long-duration Treasuries: Continued upside in a disinflationary or recessionary environment.

These sectors offer a combination of income generation, relative valuation support, and resilience under tightening financial conditions.

Curmudgeon Note: Other defensive equity sectors include: health care, energy, consumer staples, and telecommunications.

Cartoon of the Week:

Image Credit: Hedgeye- June 17, 2026

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End Quote - Fallacy vs Reality:

“Interest rates are the cost of credit - not money." Famous economist Milton Friedman said this to correct a common misunderstanding in monetary policy:

The Fallacy: Many people and central bankers traditionally assumed that low interest rates meant "easy money" (an abundant money supply) and high interest rates meant "tight money."

The Reality: Friedman argued that interest rates are simply the price of credit (borrowing resources over time). A central bank might mistakenly keep interest rates low even when money is actually tight, or drive rates higher due to inflation expectations rather than a lack of money.

Milton Friedman at 50 years old.

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Reference - Video Worth Watching:

Milton Friedman on money and inflation:

https://www.youtube.com/watch?v=B_nGEj8wIP0

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Wishing you good health, success and good luck. Till next time...

The Curmudgeon
ajwdct@gmail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional.  He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996.  He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever-changing and arcane world of markets, economies, and government policies.  Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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