From inflation to bond chaos: 5 crises Kevin Warsh may inherit as Fed chair

As incoming Federal Reserve Chair Kevin Warsh prepares to take charge, Wall Street is rapidly dialing back expectations of interest rate cuts amid rising bond market volatility and persistent inflation pressures.

Bond market volatility intensifies pressure

According to a report by Jefferies, the sharp rise in US Treasury yields has effectively become the first “stress test” for Warsh, who is set to be sworn in by US President Donald Trump on Friday.

The benchmark US 10-year Treasury yield climbed from 4.31 per cent on May 7 to as high as 4.685 per cent earlier this week before easing slightly near 4.60 per cent. At the same time, the MOVE Index, a key gauge of bond market volatility, surged from 69.6 to 86.1, signalling heightened investor anxiety across financial markets.

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Jefferies said the MOVE Index has now become a more important indicator than the VIX in tracking investor risk aversion in the current market environment.

Markets no longer expecting Fed easing

Market participants are increasingly pricing in the possibility that the Federal Reserve may keep rates elevated for longer, and in some cases are even considering another rate hike instead of policy easing this year.

A separate report noted that Wall Street has “pretty much written off” the idea of a Fed rate cut during Warsh’s first Federal Open Market Committee (FOMC) meeting.

The shift in expectations reflects concerns that inflationary pressures may remain persistent despite earlier hopes of monetary easing in 2026.

Inflation shock adds to concerns

The changing market sentiment comes after hotter-than-expected US producer inflation data. US Producer Price Index (PPI) inflation rose 6 per cent year-on-year in April, significantly above market expectations of 4.8 per cent, while monthly PPI jumped 1.4 per cent.

Jefferies said the inflation spike reflected the growing economic impact of disruptions linked to the Strait of Hormuz crisis, which has intensified fears over global energy supply chains and transportation costs.

Investors are increasingly worried that higher producer prices could eventually spill over into broader consumer inflation measures such as CPI and PCE inflation.

Goldman Sachs flags balance sheet concerns

Goldman Sachs analysts expect only modest expansion in the Federal Reserve’s balance sheet until early 2027, indicating the central bank is likely to maintain a cautious policy stance amid elevated market risks.

Warsh has repeatedly argued that the Fed’s balance sheet remains excessively large and continues to distort financial markets. However, analysts believe any aggressive attempt to shrink the balance sheet too quickly could create additional pressure on Treasury markets and financial stability.

Tough start for the incoming Fed chief

The developments underline the difficult balancing act facing Warsh as investors closely monitor inflation trends, bond market stability and the future trajectory of US interest rates.

With Treasury yields rising, volatility climbing and inflation risks resurfacing, the new Fed chief may face one of the toughest starts for a Federal Reserve chair in recent years.