7.2 New Fed Chair Kevin Warsh: First International Appearance as a "Hawk in Dove's Clothing"

Newly appointed Federal Reserve Chair Kevin Warsh delivered his first international speech at the European Central Bank's Central Banking Forum in Portugal, with core views summarized as follows:

1. Inflation Target: Firmly Anchored at 2%

Warsh made it clear that the Fed will not allow inflation to deviate from the 2% target line, and will make bringing inflation back to around 2% a key priority.

2. Interest Rate Policy: Abandoning Forward Guidance

The Fed will no longer issue any "forward guidance." Warsh even remarked, in a slightly joking yet thought-provoking manner, that he does not want to show all his cards before meetings, and hopes that at the July Federal Open Market Committee meeting, members can engage in full discussion like a "family debate."

3. Communication Mechanism Reform: Bold and Decisive

Regarding the "dot plot" mechanism, Warsh indicated it could be retained for a while, but a special team has been established to review it. This signals his intention to vigorously reform the Fed's communication mechanism.

4. Inflation and Oil Prices: Paving the Way for Rate Cuts

Warsh reiterated that current U.S. inflation is closely tied to events in the Middle East, and with international oil prices having fallen sharply to pre-Middle East crisis levels, inflation expectations have also dropped significantly. This seems to lay the groundwork for a potential rate cut at "some future point."

5. Artificial Intelligence and Productivity: A Long-Term Tool Against Inflation

He once again expressed optimism about the long-term development of AI, believing that using AI to boost productivity can reduce inflation, a line of thinking that will be consistently applied.

6. Policy Making: Based on Real-Time Data

Warsh hopes that within the next year, the Fed will be able to implement policy making based on real-time data, utilizing new institutions and technologies in the process.

7. Balance Sheet Reduction: Determination and Pace

Warsh insists on shrinking the Fed's massive balance sheet (amounting to $6.7 trillion), but emphasizes the need for adequate communication with the market before making decisions. He states that balance sheet reduction is a must, but requires time and new methods. He may work with Bessent to advance this, aiming to gradually phase out micro-market interventions, leaving the Fed's balance sheet primarily composed of U.S. Treasuries and exiting implicit guarantees for the real estate and credit markets.

8. Team Building: Breaking Convention with International Advisors

Warsh invited former Bank of England Governor Mervyn King to head the "Communication Working Group," a move that breaks convention and carries deep significance. The two have known each other for over 20 years, frequently participated in cross-border policy coordination during the 2008 global financial crisis, and share a high degree of alignment on "rethinking quantitative easing," "studying central bank monetary policy," and "central banks should not over-intervene in markets." Mervyn King's speaking style is vague but he excels at explaining policies in plain language, which may help Warsh manage the "degree of ambiguity" in communication, change the Fed's current verbose and jargon-laden speaking style, and support his reform of eliminating "forward guidance" and the "dot plot."

Summary: The New Tone of the Fed's "Warsh Era"

Warsh's first international appearance clearly defined the Fed's "new era" of strictness. Going forward, the Fed will become "unpredictable" again, and markets must learn to "take risks based on data" rather than relying on the Fed to "rescue the market." The 2% inflation target is reinforced once more, and it is possible that Warsh will achieve it through various means, including "trimmed mean." Meanwhile, balance sheet reduction, as a key move to drain dollar liquidity, is an important prelude to future rate cuts. Only when the dollar's credit is restored can the logic of a "weak dollar but strong dollar" be realized. For investors, this means facing increasing uncertainty.