In a report released on June 21, Morgan Stanley Chief Global Economist Seth B. Carpenter reviewed the first FOMC meeting under new Fed Chair Kevin Warsh. Carpenter concluded that Warsh intentionally withheld guidance on the rate path, consistent with his personal philosophy. However, market expectations for a rate hike this year were actually reinforced. Two signals deserve more attention: inflation may fall more than expected, and the balance sheet runoff may be larger than imagined.
Three Key Conclusions
① Warsh's first meeting provided no rate roadmap — a signal in itself. Carpenter noted that Warsh deliberately reduced forward guidance, his long-held philosophy. The FOMC statement's blunt phrase "the Committee will achieve price stability" sounded resolute but gave no path. The dot plot showed FOMC participants forecast only one rate hike this year. Carpenter calculated that if one more participant removed that hike, the median would become no hike. The 2026 core inflation forecast is 3.3%, but Carpenter believes the tariff pass-through effect has largely run its course, and inflation for the rest of the year will likely be lower than expected. If inflation indeed falls more than expected, and the next year's dot plot shows rate cuts, then the logic for a single hike this year would collapse.
② The balance sheet runoff may be more aggressive than markets expect, but the impact may be smaller. Warsh's stance on runoff is clear. Carpenter pointed out that simply halving the Treasury's account balance could shrink the Fed's balance sheet by about $500 billion with almost no market impact. Combined with paying lower interest on some reserves and adjusting liquidity regulations, banks' demand for reserves will decline, leaving more room for runoff. Carpenter judged that the ultimate runoff could exceed most expectations, but the market impact could be smaller than most fears — the exception being if the Fed actively sells mortgage-backed securities (MBS).
③ The Fed's core framework is being reexamined, but the 2% inflation target will not change soon. Warsh announced a special task force to review the policy framework, but Carpenter stressed that the 2% target has been reaffirmed. Notably, the TIPS market has detected a divergence between the Fed's preferred PCE and CPI. Whether the study will lead to "moving goalposts" remains unclear. Another key change is communication: the FOMC statement was significantly streamlined and reorganized, but Carpenter noted this is not unprecedented — before 1994, the Fed issued no post-meeting statement. As for dropping forward guidance, Carpenter believes its significance is overrated; it is only useful near the zero lower bound.
Warsh's 'De-Guidance' Philosophy: Is the Market Really Listening?
The streamlined FOMC statement was seen externally as a radical change. But Carpenter reminded that this is not the first time the Fed has adjusted its communication. Before 1994, the Fed issued no post-meeting statement at all. The length and content of statements have changed many times since. Regarding the removal of forward guidance, Carpenter argued its impact is exaggerated. Economists have long pointed out that forward guidance only matters when rates are near zero. In a normal rate environment, markets focus on the dot plot and officials' speeches for data judgments. Warsh's adjustment is more a return to tradition than a substantive policy shift. Carpenter also noted that markets treat officials' comments as commitments, while officials themselves see them as conditional views on data — this mismatch is the real source of communication problems.
Rate Hikes vs. Balance Sheet Runoff: Which Deserves More Attention?
Carpenter's core judgment: rate path changes may be less significant, but the runoff path may exceed expectations. There is a contradiction in the rate hike logic: if inflation indeed comes in lower than expected, and the dot plot shows rate cuts next year, what is the point of a single hike this year? Carpenter implies that market panic over rate hikes may be overdone. Runoff is different. Warsh's preference for runoff is certain, and Carpenter outlined specific paths: reducing the Treasury account, adjusting reserve interest, modifying liquidity rules — these can shrink the balance sheet to a significantly lower level without disrupting markets. The only exception risk is the Fed actively selling MBS, which could truly trigger market volatility.
What the Market Is Debating
The biggest market divergence is not about what Warsh said, but about the two things he did not say. First, rate hikes: the dot plot shows one hike this year. But Carpenter's logic: if inflation indeed falls more than expected, this hike would be both unnecessary and inconsistent with the prediction of rate cuts next year. Second, runoff: Warsh's preference is clear and the path is clear. But Carpenter believes market impact may be overestimated, except for the case of active MBS sales. The answers to these two debates depend on three data points: whether subsequent core PCE remains below 3.3%, when the Fed provides specific runoff details, and what reform recommendations the policy framework review task force will produce.