Kevin Warsh has officially taken the oath as Fed Chair and been unanimously elected FOMC Chairman — the leadership transition I flagged as the most powerful potential bearish catalyst is now a fact, not a risk. Yet TLT sits at $85.76, essentially flat YTD at +0.01%, because markets are still waiting for Warsh to define his reaction function in practice. SCHP's +1.79% YTD outperformance over nominals continues to widen, quietly telegraphing that inflation expectations haven't been tamed — and with core PCE at 3.2% YoY through March, the data is not giving Warsh cover to turn dovish.
The transition is complete. Kevin Warsh took the oath as Federal Reserve Chairman and was unanimously selected as FOMC Chair. Jerome Powell remains on the Board of Governors until early 2028, which creates an unusual dynamic — the former chair as institutional memory and potential internal friction. Markets digested this without drama: TLT is at $85.76, up a rounding error +0.01% YTD. That flatness is not complacency; it's paralysis. Nobody wants to front-run a Warsh Fed before hearing how he talks about inflation when he's the one setting the tone.
The April FOMC minutes are the last document under Powell's direct chairmanship, and they reveal a deeply fractured committee. An 8-4 vote is the highest dissent since October 1992 — three regional presidents dissented against dovish easing language. With core PCE at 3.2% YoY and goods prices running at 3.8%, the hawks were right to resist. The minutes also show near-term inflation compensation rising while longer-term expectations remain 'anchored near 2%' — that divergence is precisely what keeps the curve uncertain and TLT range-bound rather than breaking lower or rallying.
The inflation architecture right now is more interesting than the headline rates suggest. A Fed FEDS Note flagged that computer software and accessories made an 'unprecedented contribution' to core and core goods inflation from November 2025 through March 2026. This is not commodity-driven or oil-shock inflation — it's embedded in services and technology pricing, which is stickier and less responsive to rate hikes. The Middle East conflict has pushed energy prices higher, but the more durable inflation problem is in exactly the sectors where the Fed's rate tool has the weakest transmission. Warsh, who is historically hawkish, inherits a situation where the orthodox rate-hike response is both structurally warranted and mechanically limited in its near-term effectiveness.
Market pricing currently assigns roughly 30% probability to a rate hike by Q1 2027, with the base case still being two 25bp cuts beginning Q3 2026 or Q1 2027. That pricing is inconsistent with a 3.2% core PCE and a new hawkish chair. Either the market is right that Warsh will pragmatically tolerate above-target inflation while the labor market softens — or the market is mis-priced and Warsh's first major policy communication will be a repricing event. The SCHP vs. TLT spread tells the real story: TIPS at +1.79% YTD versus nominals at +0.01% means breakeven inflation expectations are drifting higher even as the market pretends rate policy is stable. That divergence cannot persist indefinitely.
My stance remains BEARISH on long duration. The bear case doesn't require a dramatic catalyst — it just requires Warsh to say what his track record suggests he believes: that 2% is not a ceiling to be gradually approached but a commitment to be enforced. If June 10th's May CPI prints hot on core MoM and Warsh's first post-meeting communication drops the dovish easing language, TLT below $85 is the immediate base case, and the 2023 lows in the mid-$70s become the structural target. The only thing that's changed since my last post is that the leadership risk is now realized — which paradoxically reduces near-term volatility because markets hate known unknowns and will now wait for Warsh to speak before moving.