Analysis

Kevin Warsh Takes the Fed’s Helm — and Walks Straight Into a Rate-Hike Storm

Published

2 months ago

May 23, 2026

The swearing-in was choreographed for maximum symbolism. On Friday morning, May 22, 2026, Kevin Warsh stood in the East Room of the White House as Supreme Court Justice Clarence Thomas administered the oath that made him the 11th chair of the Federal Reserve in the modern banking era. Not since Alan Greenspan’s ceremony in 1987 had a Fed chair been sworn in at 1600 Pennsylvania Avenue. The setting said everything about what Donald Trump wanted from this appointment. What the bond market said back was rather different.

The Narrative That Broke on the Way to the Podium

For most of 2025 and into early 2026, Wall Street operated on a comfortable consensus: Warsh would replace Jerome Powell, ease financial conditions, and deliver the rate cuts a frustrated White House had been demanding for over a year. Investors debated whether the Fed would trim rates two or four times in 2026. The only real argument was about speed.

That consensus collapsed well before Warsh’s hand left the Bible.

April’s Consumer Price Index came in at 3.8% year over year — a three-year high, up from 3.3% in March and ahead of Wall Street’s forecast of 3.7%. The Producer Price Index for the same month showed wholesale prices rising 6.0% annually. Together, the two readings delivered a message bond markets processed without hesitation: the next move by the Kevin Warsh Federal Reserve might not be a cut at all. It might be a hike.

The Federal Reserve has held the benchmark federal funds rate at 3.5% to 3.75% since late 2025, itself a compromise position forged amid the competing pressures of an Iran war-driven oil shock, sticky services inflation, and a labour market that refused to crack. Oil surged above $115 per barrel at the height of the Middle East conflict, compressing the Fed’s already narrow room to manoeuvre. What had been a manageable inflation overshoot became something harder to dismiss.

1: The New Chair and the Inheritance He Didn’t Expect

Kevin Warsh, 56, arrives at the Marriner Eccles Building with an unusual duality on his résumé. During his confirmation hearing before the Senate Banking Committee on April 21, he positioned himself as a reformer — promising a “reform-oriented Federal Reserve,” tighter communication discipline, and an aggressive reduction of the central bank’s bloated balance sheet. He also argued, as recently as 2025, that advances in artificial intelligence would boost productivity, push down inflation, and create room for rate cuts. That was all before the Iran war changed the inflation arithmetic.

The Senate confirmed Warsh on May 13 in a 54-45 vote — the most divisive confirmation in Federal Reserve history — with Pennsylvania Democrat John Fetterman the only member of his party to cross the aisle. Jerome Powell, who served eight years and endured repeated personal criticism from Trump, will remain on the Fed’s Board of Governors until 2028.

What Warsh inherited was not a compliant committee. At the April FOMC meeting — Powell’s last as chair — four of the 12 voting members dissented against either the rate decision or the policy statement, the highest number of dissents since 1992. That kind of institutional fracture doesn’t resolve simply because someone new sits in the chair. Warsh will preside over his first FOMC meeting in June facing a committee that is, by historical standards, unusually fragmented.

And the data is moving against him fast. Monthly CPI has averaged 0.4% for each of the past six months. According to analysis by Bank of America Global Research and Bloomberg, if that pace continues, headline inflation could hit 5.2% by November’s midterm elections — even a moderation to 0.3% monthly would land at 4.4%, the highest since April 2023. Shelter inflation alone doubled in April. Energy costs, amplified by the Iran conflict, are pushing through supply chains and into consumer prices with a speed that earlier models underestimated.

Warsh said at his confirmation hearing that the Fed needs a different framework for assessing inflation — that the Personal Consumption Expenditures index “offers only a rough take, even when volatile food and energy prices are excluded.” That may be analytically defensible. It does not change the headline numbers that the bond market is reading every Thursday morning.

2: What Markets Are Actually Pricing — and Why It Matters

Will the Federal Reserve raise rates in 2026 under Kevin Warsh?

Based on current fed funds futures data, traders now assign a 57% probability to at least one rate hike by December 2026, according to the CME Group’s FedWatch tool. A December hike alone carries roughly 51% odds; the probability rises to 60% for January 2027 and above 70% for March 2027. Less than four weeks ago, traders assigned virtually no probability to hikes at all — they were debating the pace of cuts.

That repricing has been sharp and broad-based. The benchmark 10-year Treasury yield has climbed to hover around 4.67%. The 30-year yield topped 5.0% — its highest level since 2007. The 2-year yield, most sensitive to near-term Fed expectations, broke above 4% for the first time in 11 months, a signal that the market is pricing the policy rate staying elevated and potentially moving higher.

The picture is more complicated than a simple hawkish/dovish binary. Warsh enters with a genuine philosophical belief that the Fed’s balance sheet — still swollen from successive rounds of quantitative easing — is itself inflationary. His argument, developed in a 2025 op-ed and reiterated during confirmation, is that aggressive balance sheet reduction could allow rate cuts to happen sooner, because tightening financial conditions via asset sales would do some of the work currently done by the funds rate. J.P. Morgan strategists’ base case, as of mid-May, is that the Fed holds rates steady through the end of 2026, with the unemployment rate relatively stable and inflation still elevated.

Yet the FOMC hawks may not wait for Warsh’s balance sheet theory to play out. “The April CPI release underlines the challenge facing Warsh … and the distance the inflation data needs to travel back in favor of disinflation before the FOMC could consider reducing rates further,” Krishna Guha, head of economics and central banking strategy at Evercore ISI, wrote following the April data. “It also gives a little more ammo to the hawkish minority who think the next move is as likely to be up as down.”

That hawkish minority is no longer a fringe. The FOMC minutes from the April meeting, released on May 20, showed a growing number of policymakers warning that the central bank may need to raise rates if inflationary pressures don’t cool. The new chair may find himself chairing a committee more hawkish than he is.

3: The Second-Order Consequences

The implications extend well beyond the immediate question of whether rates rise 25 basis points in December. The repricing already underway carries real economic weight.

The 30-year Treasury yield at 5% has direct consequences for mortgage costs, which remain a pressure point for American households already stretched by five consecutive years of above-target inflation. A housing market that has been essentially frozen — high prices, elevated mortgage rates, minimal transaction volumes — would face further compression if long rates push higher still. Bank of America analysts, in early May, predicted the Fed will hold off on lowering rates until the second half of 2027. That forecast implies more than a year of no relief for variable-rate borrowers.

For corporate balance sheets, the impact is asymmetric. Companies that locked in cheap fixed-rate debt during 2020–2021 are insulated for now. But the refinancing wall looms: trillions of dollars of corporate bonds issued at sub-3% yields will mature over the next 18 months. If the funds rate stays at 3.5% to 3.75% — or rises above it — the rollover will crystallise at materially higher costs. Companies with pricing power and strong balance sheets will absorb this. Those without it won’t.

The political arithmetic matters too. Trump installed Warsh specifically to get lower rates ahead of the 2026 midterms. The irony is sharp: an incoming chair nominally aligned with the White House’s preferences may be driven by the data to do precisely the opposite of what the White House wanted. Monthly inflation at 0.4% is a number that prints in grocery store prices, energy bills, and insurance premiums — the kind of inflation voters feel viscerally and punish at the polls. A Fed that raises rates would slow the economy; a Fed that doesn’t and lets inflation accelerate would arguably hurt Trump’s midterm prospects more directly.

Warsh has already acknowledged a version of this bind. He told the Senate Banking Committee that the Fed “needs a different framework” — an admission, in diplomatic language, that the existing tools may not be well-calibrated to the current shock. Whether that means rate hikes, aggressive balance sheet reduction, or some novel combination is a question the first few FOMC meetings of his tenure will begin to answer.

4: The Case for Patience — and Why Some Analysts Aren’t Panicking

Not everyone agrees the Fed is headed for a rate-hike cycle.

The dissenting argument, made most forcefully by economists at Capital Economics, starts with the observation that much of the current inflation overshoot is energy-driven and therefore transitory in the precise sense the word implies: it will mean-revert when oil prices stabilise. The Iran conflict produced a spike to $115 per barrel; a ceasefire sent oil below $95 within hours. If the geopolitical shock fades, headline CPI could ease significantly by late 2026 without any policy action.

Stephen Brown, deputy chief North America economist at Capital Economics, described Warsh as “a relatively safe pick” for markets compared with other candidates who had been floated — precisely because his hawkish reputation on inflation would prevent a politically motivated easing cycle. That hawkishness, paradoxically, might allow him to hold steady rather than hike: credibility on inflation buys time that a dovish chair would not have.

There is also the growth argument. U.S. GDP has continued expanding at around 2% despite elevated rates, consumer spending has held firm, and S&P 500 corporate earnings have kept growing. A labour market that remains relatively resilient — neither accelerating nor cracking — removes some urgency from both cutting and hiking. Rate hikes require a clearer inflation-acceleration signal than the current data unambiguously provides.

The CME FedWatch probabilities themselves illustrate the uncertainty. Fifty-seven percent odds of a hike by December imply, equally, a 43% chance there is no hike. Markets are genuinely split. That is different from markets confidently pricing in a tightening cycle. Warsh has the institutional flexibility, if the inflation data cooperates even modestly, to hold and claim patience as strategy rather than paralysis. Whether that window stays open depends almost entirely on whether oil prices stabilise and whether April’s CPI reading proves a peak rather than a floor.

The Chair Who Arrived at the Wrong Moment

Warsh’s challenge is not primarily intellectual. He understands the policy trade-offs as well as anyone who has sat in the Eccles Building. His challenge is contextual: he was chosen to ease, installed to ease, and confirmed — narrowly — in a political environment that expected him to ease. The economy has not cooperated with that mandate.

The man who cited Alan Greenspan in his swearing-in remarks now faces a test Greenspan himself would recognise: the gap between what a new Fed chair promises and what the data demands. Greenspan learned in his first year that the economy sets the agenda, not the chair.

Bond markets figured that out on Friday. The rest of Washington is catching up.

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Analysis

China Economy 2026: Export Growth Masks Manufacturing Overcapacity

Published

7 hours ago

July 10, 2026

Abdul Rahman

China’s exports have been the good-news story in an otherwise mixed economic picture. They’re not just holding up; through the first four months of 2026 they were running about 14% to 15% above the same period a year earlier, according to figures cited by the US-China Economic and Security Review Commission and Vanguard’s economic outlook. That’s the kind of number that would normally signal a healthy economy. The complication is what’s happening underneath it.

A growth model showing its age

Manufacturing capacity utilization fell to 73.9% in early 2026 — near a decade low outside of the pandemic shutdowns, per the Commission’s bulletin. That’s the tell. China is producing and shipping more, but a growing share of its industrial base is running under capacity, which points to a structural mismatch: the country’s manufacturing engine has outgrown both its domestic consumption and, increasingly, what the rest of the world is willing to absorb without pushback.

Goldman Sachs Research, in a report cited by Goldman Sachs’ own analysis, forecasts 4.8% real GDP growth for 2026 — above consensus expectations of 4.5% — driven substantially by continued export strength and a softening drag from the property downturn. But that same report flags the labor market as a genuine weak spot: hiring, measured across a weighted average of PMI employment sub-indexes, is at its most depressed level in a decade outside Covid, and urban nominal wage growth slowed to just 3.8% year-on-year in Q3 2025.

Why Beijing isn’t reaching for stimulus

Given the export strength, one might expect policymakers to feel less urgency about consumption-side stimulus. That’s roughly what’s happening — and it’s a deliberate choice, not an oversight. Xi Jinping’s government remains committed to dominating high-value manufacturing, which means comprehensive fiscal stimulus aimed at consumers remains unlikely even as domestic demand stays soft, according to the Commission’s bulletin.

The People’s Bank of China is expected to hold its policy rate steady through the rest of the year, preferring targeted structural tools over a broad-based rate cut, per Vanguard’s forecast. That’s a notably cautious stance given how weak the property sector remains — property investment indicators are down 50% to 80% from their 2020–21 peaks, and a “meaningful domestic-demand turnaround remains elusive,” in Vanguard’s own words.

The regulatory push to keep capital at home

Two moves by Chinese regulators in mid-2026 point to where Beijing’s real priority sits: keeping household savings and private capital funneled toward domestic industrial policy rather than flowing overseas. New rules taking effect July 1 restrict outbound investment that could be used to export restricted technology or expertise under the guise of ordinary capital flows, with violations carrying fines, visa restrictions and industry blacklisting, according to the Commission’s bulletin. The regulations follow Beijing’s move to block the founders of AI firm Manus from completing a sale to Meta, even after the company had relocated its headquarters from China to Singapore — a signal that Beijing is willing to reach across borders to keep promising tech assets tethered to domestic or Hong Kong listings.

The currency and trade angle

Goldman’s team makes an out-of-consensus call worth flagging: it expects China’s current account surplus to rise to 4.2% of GDP in 2026, up from 3.6% in 2025, while the broader analyst consensus surveyed by Bloomberg expects a decline to 2.5%. The divergence comes down to export resilience — falling export prices are making Chinese goods more competitive even as the yuan is expected to appreciate slightly, with export-price inflation in dollar terms forecast to turn positive, rising to 0.7% from -2.7% the prior year.

The bottom line

China’s economy in 2026 is a study in contrasts: robust headline export growth sitting on top of underutilized factories, a weak labor market, and a property sector still in its fifth year of decline. The World Bank’s own baseline, published in its country program materials, projects growth moderating toward 4.0% by 2026 — a more conservative read than Goldman’s. Either way, the consensus across forecasters is the same: exports are carrying more of China’s growth than is healthy for the long run, and Beijing’s policy choices this year suggest it’s betting on technological dominance to eventually solve the demand problem, rather than opening the stimulus taps to solve it directly.

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Analysis

Pakistan Circular Debt Crisis 2026: IMF Deadline Missed, Rs 3.44 Trillion

Published

7 hours ago

July 10, 2026

Abdul Rahman

There’s a number that keeps showing up in every conversation about Pakistan’s economy, and it keeps getting bigger: circular debt. As of early July 2026, the gas sector’s share of that debt alone has topped Rs 3.44 trillion, and Islamabad has missed a deadline the IMF set for tariff reforms meant to arrest the slide, according to Dawn.

What circular debt actually is, and why it won’t go away

Circular debt is the chain of unpaid obligations that builds up when the price consumers pay for electricity or gas doesn’t cover what it actually costs to produce and deliver it. Someone in the chain — a power producer, a gas utility, a state-owned enterprise — ends up carrying an IOU, and that IOU gets passed down the line. Earlier this year, IMF officials pressed Pakistan on exactly this dynamic, questioning the government’s plan to zero out gas-sector circular debt, according to Aaj English. At the time, officials said around Rs 150 billion remained payable to companies including Oil and Gas Development Company Limited and Pakistan Petroleum Limited.

Islamabad’s proposed fix included a Rs 5-per-unit levy on gas, dividends from state-owned companies redirected toward debt reduction, and the sale of 35 LNG cargoes annually on the international market. The IMF, per that same reporting, raised pointed questions about whether the plan was actually viable.

The commitments Pakistan has already made

Under its Extended Fund Facility, Pakistan has committed to capping circular debt growth at Rs 300 billion for FY2027 and cutting power-sector subsidies from 0.7% of GDP to 0.6%, according to details reported by ProPakistani. The government has also shifted Nepra’s annual tariff-rebasing cycle from July to January, and Ogra now revises gas tariffs twice a year instead of once.

Structurally, some of this is working. The IMF’s own review in May 2026 credited Pakistan with a primary fiscal surplus of 1.6% of GDP for FY26, broadly in line with program targets, and noted gross reserves had climbed to $16 billion by end-December, up from $14.5 billion six months earlier, according to the IMF’s own press release. That progress unlocked roughly $1.1 billion under the EFF and $220 million under a parallel climate-resilience facility, bringing total disbursements under the two arrangements to about $4.8 billion.

Where the fault lines actually are

The uncomfortable part of this story, laid out by commentary reported in The Hans India, is that revenue targets get IMF scrutiny with great precision, while structural reform of loss-making public enterprises — Pakistan International Airlines and Pakistan Steel Mills chief among them — moves far more slowly. Those enterprises’ losses are absorbed by the national exchequer through subsidies, guarantees, and debt restructuring year after year, and privatization plans keep slipping because the political cost of confronting them is high.

Distribution company inefficiency compounds the problem. In FY25, Discos posted Rs 265 billion in losses, an improvement on FY24’s Rs 276 billion but still a substantial drag, according to Geo News, with Quetta, Peshawar and Hyderabad among the worst-performing utilities.

What happens if the pattern holds

Pakistan’s debt-to-GDP ratio sits between 70% and 80% as of 2026, according to Wikipedia’s economic summary, with debt servicing occasionally consuming two-thirds of government spending. That’s the backdrop against which every circular-debt conversation happens: there is very little fiscal room left to absorb another missed deadline.

The missed gas tariff deadline doesn’t automatically trigger a program breakdown — Pakistan has weathered similar friction points before during its current EFF arrangement. But with the IMF’s own documentation showing persistent concern about the credibility of debt-reduction plans, and with global energy prices still elevated in the aftermath of the Iran war, the margin for further slippage is thin. The next review will likely hinge less on the rhetoric around reform and more on whether the Rs 5 levy and LNG cargo sales actually show up in the numbers.

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Analysis

Malaysia Bets Its 2026 on “Execution” — And the Semiconductor Upcycle Is Doing the Heavy Lifting

Published

5 days ago

July 5, 2026

Abdul Rahman

Malaysia’s government has declared 2026 a year of “execution” and “discipline” as the Anwar Ibrahim administration races to deliver on the 13th Malaysia Plan (RMK13) ahead of elections that could come as early as February 2028, according to Fortune’s interview with economy minister Akmal Nasrullah Mohd Nasir.

A Strong Base to Build From

Malaysia’s economy grew 4.9% in 2025 following 5.1% growth the year before, with unemployment falling to 2.9% — the lowest in a decade — and the ringgit trading at its strongest level in five years. HSBC’s ASEAN economist Yun Liu forecasts 4.6% growth for 2026, citing strength in electrical equipment manufacturing, tourism, and sound government policy, while Nomura economists have projected an even more bullish 5.2%, pointing to infrastructure spending under RMK13.

The ASEAN+3 Macroeconomic Research Office (AMRO) projects growth moderating slightly to 4.6% from an estimated 4.9% in 2025, describing Malaysia’s performance as reflecting its “entrenched position in global semiconductor and electronics value chains” and the broader global tech upcycle, according to AMRO’s assessment of Malaysia’s investment upcycle.

Navigating Washington Without Picking Sides

Malaysia’s trade relationship with the US has been turbulent. Washington imposed 25% tariffs on Malaysian goods in April 2025, rattling the country’s export-led economy, before a deal reduced US duties to 19% in exchange for Malaysia lowering tariffs on select American products, with exemptions carved out for aviation components and electrical equipment. Malaysia’s trade hit a record high of more than 3 trillion ringgit (roughly $780 billion) last year despite the friction.

Deputy finance minister Liew Chin Tong has framed Malaysia’s positioning explicitly around neutrality: the country is “not China, not the US,” a stance he argues gives Malaysia a strategic advantage in both geopolitical and supply-chain terms, according to Fortune’s reporting from the Forum Ekonomi Malaysia summit.

Capital Is Flowing In — From Everywhere

Malaysia recorded 22.8 billion ringgit (about $5.8 billion) in foreign direct investment in the first quarter of 2026, a 6.0% year-on-year increase, moderating from the prior quarter’s 48.7% surge. Inflows into information and communication technology services remained particularly strong, with China, Hong Kong, and Singapore serving as the primary capital sources, according to McKinsey’s Southeast Asia quarterly economic review. Bank Negara Malaysia has held its policy rate steady following a pre-emptive 25 basis-point cut in July 2025, with headline inflation projected to average just 2.0% in 2026.

The Long Game: Semiconductors, Rare Earths, and Nuclear Power

Beyond RMK13’s near-term targets, Malaysian officials are positioning the country’s industrial strategy around decades, not years. Minister Akmal has reiterated commitments to eliminate coal use by 2044 and reach net zero by 2050, while confirming Malaysia is actively “exploring the potential” of nuclear power to meet the energy demands of its expanding data-center and semiconductor sectors. AMRO’s structural policy guidance urges Malaysia to develop domestic semiconductor and rare-earth capabilities as a hedge against ongoing US-China “geoeconomic fracturing,” positioning the country as a trusted neutral hub for global manufacturers diversifying away from concentrated exposure to either superpower.