What are the challenges of the WoSh shrinking table?

In May 2026, the Federal Reserve experienced a leadership change, with Kevin Warsh officially succeeding Jerome Powell as Chair. This transition occurred against a backdrop of highly uncertain global macroeconomic conditions: geopolitical conflicts pushing energy prices higher, inflation pressures rebounding, sovereign debt yields generally rising, and the U.S. fiscal deficit continuing to expand. Warsh’s appointment signaled a possible shift from large-scale balance sheet interventions toward a policy framework emphasizing rules and balance sheet management, but actual implementation faces multiple constraints.

1. Policy Continuity and Potential Changes

During Powell’s era, the Fed responded to post-pandemic residual effects and economic volatility through multiple rate cuts and asset purchases. Entering Warsh’s era, markets initially expected him to coordinate with fiscal expansion to implement a dovish policy, including lowering the federal funds rate and gradually reducing the balance sheet. However, recent surges in oil prices have altered this narrative.

As of mid-May 2026, the U.S. 10-year Treasury yield rose to about 4.6%, hitting a one-year high; the 30-year yield broke above 5.1%, the highest since 2007. Core inflation data also rose, with the April CPI year-over-year increasing to 3.8%, and service inflation accelerating. Oil prices, influenced by Middle East tensions, temporarily exceeded $105 per barrel, transmitting energy costs into broader price indices.

Warsh has emphasized a return to “orthodox” monetary policy, favoring control of money supply through balance sheet management rather than relying solely on short-term interest rates. This approach is similar to Vollker’s focus, but the current environment differs. Fed futures imply nearly a 50% chance of rate hikes by the end of 2026, rather than the previously expected multiple rate cuts. Warsh may face a path of “symbolic tightening to demonstrate anti-inflation resolve, followed by observation of oil price trends,” but historical experience shows that a Fed chair’s first rate hike often triggers market volatility, as seen after Greenspan’s shift post-1987 stock market crash.

Operational space is limited. Over the past 12 months, U.S. interest expenses have approached $1.3 trillion, constituting a major part of the fiscal deficit. In the first seven months of fiscal 2026, net interest spending exceeded $616 billion, a 6.4% increase year-over-year. The average interest rate paid is about 3.34%, but current market yields are far higher, increasing rollover costs. Lowering short-term rates could ease debt service burdens, but long-term yields are determined by fiscal sustainability and global capital flows; simply cutting rates is unlikely to significantly lower long-term rates.

2. Global Bond Market Pressures

Rising bond yields are not unique to the U.S.; they are a global phenomenon. Japan’s 30-year government bond yield reached a record high of nearly 4.2%; the 10-year JGB yield rose to around 2.8%. UK gilts yield over 6%, and eurozone bonds are also facing sell-offs. The average borrowing cost for G7 countries’ 10-year bonds approaches 4%, about 80 basis points higher than pre-conflict levels.

This bond sell-off stems from multiple factors: energy-driven inflation fueled by war, supply chain restructuring amid de-globalization trends, and ongoing diversification of foreign central bank reserves away from USD. Foreign investors’ demand for U.S. debt weakens, as the U.S. relies on domestic financing and indirect support from the Fed. While stablecoin issuance and basis trading by hedge funds provide some buffer, these are not sustainable.

Long-term reliance on low interest rates in countries like Japan threatens banking stability and fiscal space as yields rise. Central banks worldwide face a dilemma: maintaining low rates exacerbates inflation, tightening monetary policy suppresses growth. If Warsh pushes for balance sheet reduction, this fragile equilibrium will be further tested, possibly forcing more countries to adopt unconventional tools like yield curve control (YCC).

3. Long-term Framework in the Era of De-Globalization

Since Vollker’s anti-inflation efforts in the 1980s, globalization—through trade barriers and cheap capital flows—has driven long-term declines in global interest rates. This trend supported rising financial asset prices. However, after the 2008 global financial crisis, the dollar’s reserve status was challenged, prompting countries to diversify reserves. Policies like Trump’s tariffs accelerated this secular shift.

De-globalization implies higher structural inflation and a higher interest rate center. Reduced trade diminishes the inflow of dollar funds into U.S. debt markets, while restructuring energy and critical mineral supply chains further raise costs. The boom in AI-related capital expenditure boosts demand but also increases energy consumption, adding inflationary pressures. Oil prices had already been rising before the conflict; short-term geopolitical easing might cause a correction but is unlikely to reverse the long-term upward trend.

Within this framework, the Fed’s balance sheet reduction faces fundamental obstacles. Without sufficient foreign capital inflows, the U.S. will struggle to finance its large deficits without resorting to QE. The TINA (There Is No Alternative) logic becomes apparent: with no better options, asset purchases may ultimately resume. (TINA is a widely used concept in finance, economics, and investing, meaning: “There Is No Alternative”, implying that in certain environments, investors, policymakers, or market participants have no better (or feasible) options, and must accept the current less-than-ideal choices.)

4. The Rising Significance of Hard Asset Allocation

Amid increasing risks of fiscal and monetary monetization, assets like gold and silver are becoming more attractive. In Q1 2026, global gold demand grew by 2% year-over-year, with central banks net purchasing 244 tons. Countries are accelerating reserve diversification, with gold’s share in global reserves continuing to rise. Emerging economies like China and Brazil still have significant room to increase holdings.

Turkey, among others, has been forced to sell some gold reserves due to rising oil prices, but this is a short-term liquidity measure rather than a trend reversal. Once energy stability is restored, renewed demand for strategic reserves will likely drive new buying. Goldman Sachs and other institutions project gold prices could reach above $4,300 per ounce by the end of 2026, driven mainly by central bank purchases and geopolitical safe-haven demand.

Silver also benefits from both industrial demand (solar, electronics) and investment appeal. Countries are increasingly adding hard assets like gold beyond oil reserves, reflecting waning confidence in fiat currencies over the long term.

5. Policy Outlook and Risks

Warsh’s core challenges include balancing inflation fighting with supporting economic growth, maintaining Fed independence, and managing market volatility under high debt burdens. In the short term, oil price trends will be a key variable. If conflicts ease and energy prices fall, inflation pressures may temporarily ease, opening limited room for rate cuts. But structural factors—de-globalization, energy transition costs, fiscal expansion—point toward a higher interest rate center.

Markets have shifted from expecting multiple rate cuts to a wait-and-see stance or even a 50/50 chance of rate hikes. This transition tests Warsh’s communication skills and policy credibility. History shows the Fed often prioritizes financial market stability, with inflation control secondary. Lowering the federal funds rate mainly benefits government financing, while private sector borrowing costs—especially long-term—remain elevated.

Potential “break the glass” measures include yield curve control, mandating institutions to hold government bonds, or tax incentives for domestic investors to buy Treasuries (e.g., tax exemptions). While these can stabilize markets temporarily, they risk resource misallocation and long-term instability.

Conclusion

The Powell-to-Warsh transition is not merely personnel change but a test of the post-globalization monetary policy framework. Global bond market pressures, persistent inflation, and fiscal sustainability challenges weaken traditional tools. Investors should focus on hard assets to hedge against currency devaluation and debt monetization risks, while closely monitoring energy prices, geopolitical developments, and Fed signals in June and subsequent FOMC meetings.

The macro environment is shifting from the benefits of low interest rates and globalization toward higher volatility and structural inflation. Policymakers must balance rule-setting with crisis management, and market participants need to adapt to a new asset allocation logic under greater uncertainty. This transition will influence the landscape through 2026 and beyond.