The arrival of Kevin Warsh as Fed Chair on May 15, replacing Jerome Powell, increases uncertainty over the direction of U.S. short-term rates in a context of heightened tensions in global bond markets.
What do we know about the changes desired by the new Fed governor?
Kevin Warsh believes that the most relevant inflation indicators are those that exclude as much as possible volatile components, such as the “Trimmed Mean PCE” index. In other words, one should not rule out a reduction in short-term rates by the end of the year.
He also considers that productivity gains driven by AI and deregulation should ease price pressures in the medium term.
He aims to reduce the size of the Fed’s balance sheet, and thus accelerate quantitative tightening, which is not supportive of long-term interest rates.
He intends to reduce the Fed’s predictability: no forward guidance, no dot plots, and less communication with the press, all in order to maximize the flexibility of U.S. monetary policy.
The debate over U.S. monetary policy is likely to be intense within the Federal Reserve during the upcoming meetings in mid-June and late July 2026, and the level of uncertainty surrounding the decisions to be made is high.
If the new Fed Chair wants to be able to surprise markets, markets may also surprise us, as the current outlook is particularly bleak on the long-term interest rate front.
U.S. 30-year Treasury yields are at their highest level since 2007, above 5%.
Japan’s 30-year yields are at record highs, now exceeding 4%, with a trend over recent months pointing toward a slow-moving bond market crash.
U.K. 30-year yields are approaching 6%, their highest since 1998. The situation there is also concerning.
Public debt yields in the main eurozone economies are returning to levels not seen since 2011, during the sovereign debt crisis, just before Mario Draghi’s “whatever it takes” and the first LTRO in early 2012.
All this is occurring against a backdrop of rapidly rising budget deficits:
In the United States, due to the Supreme Court challenging the legality of tariffs and increased military spending.
In Europe, where fiscal stability efforts are being undermined by slowing economic activity and a resurgence of inflation, which has risen back to 3% annually in the eurozone, compared with 2.1% just six months ago.
In the absence of a swift resolution to the Iranian crisis and improved visibility for investors, inflationary pressures could act as a catalyst for a broadening and generalized bond market crisis. In any case, the risk of a bond market crash has increased significantly in recent weeks, and borrowers should exercise heightened caution.