In a June 21 report titled "Sunday Start," Morgan Stanley Chief Global Economist Seth B. Carpenter offered a detailed analysis of Federal Reserve Chair Kevin Warsh's first Federal Open Market Committee (FOMC) meeting. Carpenter highlighted that Warsh intentionally provided no forward guidance on the interest rate path, consistent with his personal philosophy. However, market expectations for a rate hike this year were actually strengthened. Two signals deserve more attention: inflation may fall more than expected, and the scale of balance sheet reduction (quantitative tightening, QT) could be larger than the market anticipates.
Three Key Conclusions
① The absence of a rate roadmap is itself a signal. Carpenter noted that Warsh deliberately reduced forward guidance, a hallmark of his approach. The FOMC statement's blunt line, "The Committee will achieve price stability," sounds resolute but offers no path. The dot plot shows FOMC participants forecast only one rate hike this year. Carpenter calculated that if just one more participant removed that hike, the median would shift to no hike. Core inflation for 2026 is projected at 3.3%, but Carpenter argued that the tariff pass-through effect on prices has largely been absorbed, so inflation for the rest of the year is likely to come in below expectations. If inflation indeed falls more than expected, and next year's dot plot signals rate cuts, then the logic of raising rates once this year becomes untenable.
② The QT path may be more aggressive than markets think, but the impact may be less. Warsh's stance on QT is well known. Carpenter pointed out that simply halving the U.S. Treasury's account balance at the Fed could reduce the balance sheet by roughly $500 billion with little market disruption. Combined with paying lower interest on some reserves and adjusting liquidity regulations, banks' demand for reserves would decline, creating more room for QT than markets expect. Carpenter concluded that the eventual reduction could be larger than most anticipate, but the market impact might be smaller than many fear—unless the Fed actively sells mortgage-backed securities (MBS).
③ The Fed's core framework is under review, but the 2% inflation target is safe for now. 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 discrepancy between the Fed's preferred PCE and the CPI. Will the research lead to "moving the goalposts"? No clear signal yet. Another key change is communication: The FOMC statement was drastically shortened and reorganized, but Carpenter noted this is not unprecedented—before 1994, the Fed issued no post-meeting statement at all. As for removing forward guidance, Carpenter believes its importance is overrated; forward guidance is truly valuable only when interest rates are near zero.
Has the Market Understood Warsh's "Anti-Guidance" Philosophy?
The simplified FOMC statement and structural reorganization appeared radical to outsiders. But Carpenter reminded readers that this is not the first time the Fed has changed its communication style. Before 1994, there was no post-meeting statement. Subsequently, the length and content of statements have fluctuated. Regarding the removal of forward guidance, Carpenter argued its impact is exaggerated. Economists have long noted that forward guidance is only effective when rates are near zero. When rates are in a normal range, markets focus more on the dot plot and officials' economic assessments. Warsh's adjustments are more about returning to tradition in form rather than a substantive policy shift. Carpenter also noted a mismatch: markets treat officials' remarks as commitments, while officials themselves see them as conditional views on data—this is the true source of communication problems.
Rate Hike vs. QT: Which Deserves More Attention?
Carpenter's core judgment: The interest rate path may not change much, but the QT path could exceed expectations. There is a contradiction in the rate hike logic: if inflation indeed falls below expectations as he predicts, and next year's dot plot signals cuts, what is the point of a single hike this year? Carpenter implied that market fears about a rate hike may be overblown. QT is different. Warsh's preference for shrinkage is certain, and Carpenter outlined a specific path: reducing the Treasury account, adjusting reserve interest rates, and modifying liquidity rules—all of which can shrink the balance sheet to a significantly lower level without disrupting markets. The only exception risk is an active Fed sale of MBS, which could genuinely trigger market volatility.
What the Market Is Debating
The biggest disagreement is not about what Warsh said, but what he left unsaid on two issues. First, rate hikes: the dot plot shows one hike this year. But Carpenter's logic: if inflation falls more than expected, that hike is both unnecessary and inconsistent with next year's projected cuts. Second, QT: Warsh's preference is clear and the path is visible, but Carpenter believes the market impact may be overstated, except for one scenario—active MBS sales. The answers to these two debates depend on three data points: whether core PCE remains below 3.3%, when the Fed will provide a specific QT path, and what reform suggestions the policy framework review task force will produce.