Fed Breaks Markets, Signals Rate Hikes; ‘No Escape’ From Coming Disaster

12/26/2025 2:15:37 PM	long term sharp up	60 days later	+22.76%	+34.14%

4/30/2026 6:15:11 AM	medium term up	20 days later	-5.48%	-5.48%

David Lin

FOMC held rates unchanged; Warsh eliminated forward guidance from the statement; key changes include new task forces on communications, balance sheet, data, productivity, and inflation framework.

Komal Sri-Kumar

Dot plot is being de-emphasized; 9 of 19 FOMC members (excluding Warsh) voted for rate increases before year-end, some for more than one hike.

David Lin

Market reaction: S&P down 1.2%, NASDAQ down, Gold down 2.3%, 2-year yield up 15bp, Bitcoin down 2%.

Komal Sri-Kumar

Short end moved up because markets expect more rate hikes before year-end; Trump resigned to this outcome.

David Lin

What did Warsh say that prompted markets to believe in more rate hikes?

Komal Sri-Kumar

Two reasons: 1) 9 FOMC members wanted rate increases; 2) Warsh emphasized 2% inflation target seriously, rejecting flexibility to 2.5-3%.

David Lin

Warsh was a monetary hawk during 2006-2011, spoke out against QE, left in 2011 possibly in silent protest; he believes in monetarism, a 180 from Powell's 'unlearn monetarism'.

Komal Sri-Kumar

QT is unlikely to resume anytime soon; Fed postponed it to avoid a cash crunch like Sept 2019 or March 2023 regional banking crisis in the opening months of a new chairman.

Komal Sri-Kumar

Warsh was an inflationary hawk in 2009 but reversed in a late 2025 WSJ op-ed saying rates should be cut — campaigning changes views; what he does as chairman may be very different.

David Lin

CME FedWatch shows >50% chance of at least one 25bp hike by September, overwhelming odds of at least one hike by October, and only 13% chance rates stay unchanged by December; no chance of a cut.

Komal Sri-Kumar

I agree with market expectations; I have been saying the Fed should increase rates to control inflation even before the Iran war.

David Lin

Fed has been easing since late August 2024 from 5.3% to current 3.5-3.75%; what changed fundamentally?

Komal Sri-Kumar

Powell would rather have Harris elected than Trump; the rate cuts toward end of 2024 were not justified — Powell said employment was the threat and inflation controlled, but it turned out opposite.

David Lin

Trump appointed Warsh as a loyalist wanting lower rates; was there any economic justification for Trump wanting lower rates?

Komal Sri-Kumar

Trump comes from real estate; real estate people want lower rates regardless of inflation — similar to Nixon wanting Burns to cut rates in the 1970s even as inflation rose.

David Lin

Brian Chung asked Warsh how he would explain to a grocery store shopper why prices are rising faster than wages.

Kevin Warsh (clip)

We cannot have a significant effect on particular prices like oil or eggs; our job is to make sure those changes don't broaden in the economy — that's our commitment.

David Lin

How would you answer that question?

Komal Sri-Kumar

Warsh suggested a new concept called 'trimmed mean inflation' which would drop extreme price moves like eggs and beef, showing 2.3-2.5% instead of 4.2% — this would make the Fed look better.

David Lin

Was rising grocery inflation a consequence of higher oil prices from the Iran war?

Komal Sri-Kumar

Yes, higher oil translates to higher fertilizer and gasoline for transport, raising food prices; Iran oil situation is a major factor.

David Lin

Strait of Hormuz is open, oil fell from $90 to $75; if Iran deal holds and no escalation, why do rates need to go up?

Komal Sri-Kumar

Two reasons: 1) Time lag — lower oil takes months to reach gas pumps; 2) Higher fertilizer costs already paid by farmers won't be reversed — egg prices won't fall just because oil dropped.

David Lin

Can the economy withstand 1, 2, or 3 rate hikes by year-end?

Komal Sri-Kumar

Probably not; three rate hikes would likely produce stagflation by 2027 — inflation remains high while higher rates curb investment and consumption, slowing growth.

David Lin

Lesser evil: curb inflation or let economy run to protect labor market?

Komal Sri-Kumar

Curb inflation is more important; without controlling inflation, you cannot control other factors. Warsh's press conference had no reference to unemployment — only inflation.

David Lin

Judy Shelton tweeted that Warsh doesn't believe in the Phillips Curve trade-off; your take?

Komal Sri-Kumar

I do not believe in the Phillips Curve either; three rate increases would produce both higher inflation and higher unemployment.

David Lin

What will the yield curve do with rate hikes?

Komal Sri-Kumar

Flattening of the yield curve — 2-year up 15bp, 10-year up only 2bp today. But if inflation fears increase, the whole curve shifts up even if flatter; all rates end up higher.

David Lin

What happens to markets with a flattening yield curve?

Komal Sri-Kumar

A flattening curve at a higher level does not provide relief; short-term borrowers pay more, and long-term mortgage rates are also higher — the spread narrows but both rates are up.

David Lin

Colby Smith asked Warsh under what conditions he would raise rates; Warsh said 'inflation is a choice' and the committee unanimously decided to deliver on 2%.

Komal Sri-Kumar

Warsh meant they could choose 2% or accept 3-3.5%; by saying 2% remains valid, he prevented yields from shooting up even more. He is still telling you 2% is his target.

David Lin

Janet Yellen said two things cause recessions: financial imbalances and the Fed. What will happen this year?

Komal Sri-Kumar

Second half of the year, growth will come under pressure due to fear of inflation; similar to 2007 when S&P peaked in October but recession began in December.

David Lin

Warsh wants to focus on trends rather than individual data points — pros and cons?

Komal Sri-Kumar

It gives the Fed an excuse to behave differently from what the market anticipates; absence of forward guidance means more uncertainty and volatility.

David Lin

Other core differences between Warsh and Powell?

Komal Sri-Kumar

1) FOMC statement was just two short paragraphs vs. longer before; 2) No detailed dot plot — just said 9 people asked for increase; 3) Warsh did not express his own opinion on rates, becoming an observer — that doesn't cut it with markets.

David Lin

Warsh believes in monetarism — what does that mean practically?

Komal Sri-Kumar

I prefer Warsh's approach; inflation is a monetary phenomenon and policy should be oriented only toward inflation, not employment — that would be a big difference from Powell's 'seat of your pants' switching between mandates.

David Lin

Which assets might outperform with higher rates, flattening yield curve, and potential slowdown?

Komal Sri-Kumar

Fixed income: lower duration, short-term holdings; switch to long-term when long yields increase significantly. Equities: energy still has room to run; shift some tech allocation to value-oriented sectors.

David Lin

Real estate is already hurt in US and Canada; what happens with more rate hikes?

Komal Sri-Kumar

Real estate will be less hurt than other areas because it has already taken a hit and is more stable over the long term; higher cap rates provide some protection.

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