Assassination Nation
The Credit Strategist - May 2026
I never knew we needed more wars, higher gas prices, and higher interest rates to make stock prices go up. What a fool I’ve been!
Kevin Warsh will soon take the helm at the Federal Reserve now that the Department of Justice dropped its ill-conceived investigation of current Chairman Jerome Powell.His first test will be resisting political pressure to lower interest rates. Barring an unexpected change in the data, he shouldn’t cut rates for the foreseeable future in today’s stagflationary environment. The stock market is not the economy even if it plays one on television. Inflation is still far above the Fed’s 2% target (and is even higher in the real world than government statistics say it is). Economic growth is sluggish (2% in 1Q26) and unemployment is rising. Mr. Warsh would damage the Fed’s (and his own) reputation for independence by cutting rates soon after assuming the chairmanship. Part of his job should be restoring the Fed’s reputation for independence which suffered in recent years.
He is inheriting a central bank whose governing board is leaning against lowering rates despite inappropriate political pressure to do so. In the final meeting of Mr. Powell’s chairmanship that ended on April 29th, three Fed governors dissented against including an easing bias in policy at this time. Including Stephen Miron’s predictable dissent in favor of a rate cut, the four dissents from the decision to leave rates unchanged were the most in 34 years. This means Mr. Warsh enters the chairmanship leading a group with a neutral bias. This is consistent with the mood of the market and likely means further upward pressure on long rates (see below). With 10-year yields on the cusp of 4.5%, the Fed has its work cut out for it. The most significant news from the April meeting was Mr. Powell’s announcement that he intends to remain a Fed governor until the DOJ definitively ends its investigation into him. U.S. Attorney for the District of Columbia Jeannine Pirro said she could still bring charges if she was presented with evidence of wrongdoing, suggesting that the investigation may not be over. While Mr. Powell expressed support for Mr. Warsh and made clear he has no intention of acting as a back-seat driver, he said he felt he needed to remain on the Fed as a reaction to the overt attempts by the president to interfere with the Fed’s interference. It is unusual for a chairman to remain after his term is over but we live in unusual times and President Trump has nobody but himself to blame for Mr. Powell’s decision. The president badly wants to appoint somebody willing to cut rates to replace Mr. Powell but for now that will have to wait.
Lowering rates would feed speculative and unproductive lending of which there is already more than enough in the economy. There is far too much impaired or worthless debt that needs to be flushed from the system. Positive real interest rates are needed to accelerate that process and impose discipline on economic actors; even taking government inflation statistics at face value, interest rates are not sufficiently positive in real terms to do that. Lower rates reflect not a booming economy but an overleveraged one relying on debt to keep afloat. Rates should be kept at a decent margin above inflation and the Fed should start shrinking its balance sheet (by, among other things, ending its recently implemented Reserve Management Purchases). Mr. Warsh speaks of shrinking the balance sheet but also said he thinks interest rates should be lowered, the latter statement necessary to convince President Trump to appoint him. But he knows that negative real interest rates are toxic to long-term economic stability and prosperity and will hopefully exhibit the courage to end them.
The only reason to cut rates is fiscal dominance (i.e., cutting rates to reduce the cost of servicing the federal debt). But lowering rates below the rate of inflation to compensate for reckless fiscal policy not only won’t bail out the government but will deepen the fiscal deficit. We’ve already seen that lowering the Federal Funds rate doesn’t guarantee that markets will follow and can just as easily lead markets to push them higher. That’s what markets did after the Fed started lowering rates starting in September 2024 (in that month, the yield on 10-year Treasuries hit a low of 3.63% and ended the month at 3.81% and have been higher ever since). With a $39 trillion deficit ($40 trillion by October, etc. etc.), $2 trillion annual deficits (and rising exponentially), and an annual interest bill exceeding $1 trillion (and rising exponentially), it’s difficult to envision markets lowering the cost of lending money to the U.S. government outside a flight to safety trade triggered by a serious economic or geopolitical crisis (more serious than the Iran war apparently). America’s reverse global charm offensive may further increase borrowing costs. All of this renders maintaining the ascendancy of the dollar crucial for America’s economic health, which among other things means protecting the dollar/oil linkage (efforts to replace it or even erode it meaningfully with a yuan/oil linkage have yet to make much of a dent).
