Wash's First Deadlock

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Trump chose Walsh to cut rates. But on May 15, when Walsh officially took over the chair left by Jerome Powell, what he inherited was not a Fed ready to cut rates, but an FOMC where three board members didn't even agree to "hint at possible future rate cuts."

Those three dissenting votes—Cleveland's Hammack, Minneapolis's Kashkari, Dallas's Logan—cast the most unusual dissent since October 1992 at the end-April meeting. They weren't opposing rate cuts but opposing a "too dovish tone." They believed that under the current inflation environment, even hinting at cuts was inappropriate.

What Walsh took over was a central bank on the verge of being torn apart from within.

A Misunderstood Man by the Market

The mainstream market definition of Walsh comes from two rather unreliable sources.

First: Trump chose him because he wants to cut rates; the logic goes—if picked, he’ll cut. Second: At the confirmation hearing, Walsh showed some agreement with the idea that "the Iran oil shock is temporary," taken as a dovish signal.

Both assumptions overlook Walsh’s truest side over the past 15 years.

In November 2010, the Fed was debating QE2—whether to buy another $600 billion in Treasuries. Walsh voted in favor that day. That same week, he published an article in The Wall Street Journal criticizing QE2. Voting in favor but writing against it is extremely rare in Fed history; later researchers called it "silent dissent"—not real agreement, just not wanting to break consensus.

At the time, core PCE never exceeded 2.5%, and unemployment was as high as 10%. No obvious inflation pressure, yet between 2006 and 2011, Walsh delivered 13 speeches specifically citing "upside risks to inflation." While other board members discussed how to support jobs, he was already worrying about an enemy not yet seen.

Now, that enemy is at the door. April CPI at 3.8% is a three-year high. The Iran war-driven energy shock pushed gasoline prices up 28.4% year-on-year, fuel up 54.3%. In Walsh’s first week, 30-year Treasury yields just touched 5.19%, only a step away from the 2007 peak.

Inflation Is Not Just an Iran Problem

The dovish argument has a reasonable core: the Iran oil shock is an exogenous event. If there’s progress in Hormuz talks, oil prices fall from $100+ to $75-80, energy inflation fades rapidly, CPI improves naturally, and Walsh gets a window to cut rates.

This logic is sound. But there’s a line of numbers in the April inflation data that makes it messier.

Service inflation jumped to +0.5% month-on-month in April. In March, it was +0.2%.

There’s not much gasoline in service inflation. Restaurant, healthcare, transportation, entertainment—these price increases have no direct link with Hormuz. Housing component was +0.6% month-on-month, contribution doubled. Core CPI excluding food and energy rose +0.4% in April, the fastest monthly increase since the end of 2025.

In other words, inflation is spreading from the energy side to the services side. Once this process starts, even if oil falls to $80 tomorrow, service price pressures won’t disappear in two or three months.

This is the same old path of the Fed’s 2022 misjudgment of "transitory." Powell said inflation was transitory; once he realized service sector stickiness had formed, only the most aggressive rate hiking cycle could fix it. Walsh has historically been ahead of the market in recognizing inflation—this time, he’s unlikely to make the same mistake.

The FOMC He Inherits

There’s something else the market hasn’t fully priced in: the Fed that Walsh inherits is already unusually divided internally.

The April 28-29 meeting kept rates unchanged, on the surface an 8-4 vote. 8-4 is itself unusual—the last time four dissents appeared was October 1992. More subtly, the directions of dissent: three opposed hinting at cuts, one supported cutting. The board has dissent in both directions.

In the FOMC statement, the committee upgraded their description of inflation from "somewhat elevated" to "elevated." The market underestimated this wording change. In the Fed’s language system, it’s not just a tweak—it’s the board telling the market clearly: our tolerance for inflation is shrinking.

As Chair, Walsh must build consensus within this board. He faces three voting members—Hammack, Kashkari, Logan—each more eager than him to tighten. If he wants to cut, he must first convince these three.

No one can tell you how he’ll do this.

The Hidden Issue of Neutral Rate

There’s another debate outside the mainstream narrative, but possibly the most important background.

The Fed committee median estimate for the neutral rate (r-star) is about 3.0%. The current federal funds rate is 3.5%-3.75%; from this perspective, monetary policy is in "restrictive" territory—braking the economy and letting inflation gradually fall.

But Cleveland Fed has a model estimating the neutral rate at 3.7%. If this is more accurate, the current 3.5%-3.75% isn’t truly restrictive, at best "slightly tight," not enough to suppress inflation long-term.

Walsh, in past research and speeches, has consistently leaned toward r-star being higher than the committee estimate. If he pushes the Fed to reassess the neutral rate once in office, it means not only is there no room for rate cuts, even the premise that "current policy is tight enough" has to be discounted.

The market has not priced in this scenario.

One More Political Equation

Trump spent almost a year getting someone willing to "cut rates aggressively" into the Fed chair position. This, by itself, has changed the Fed’s political ecosystem.

Confirmation vote was 54-45, the closest in Fed chair history, more divided than ever. During Powell’s term, Trump subpoenaed Congressional testimony transcripts via prosecutors and publicly mocked him as "too late." Fed HQ renovations became a political tool; the crisis of Fed independence became one of 2025’s hottest topics.

Walsh's situation now: picked to cut rates, but the conditions don’t exist; if he holds off, Trump’s response is unpredictable; if he gives in to political pressure and cuts, inflation will tell the market the Federal Reserve is no longer independent.

This is not a question with a standard answer.

How Will Assets Move

Let's start with bonds.

Long-end Treasuries have been the most honest scoreboard for this macro narrative. 30-year rose from 4.4% at the start of the year to 5.19%, 10-year reached 4.67%. Barclays’ Ajay Rajadhyaksha clearly said: 5.5% is not the top; they warn this level will be breached. Citi’s rates strategist McCormick says 5.5% has become traders’ new "round-number target."

The mechanism for further long-end rises isn’t complicated: June 16 FOMC, if Walsh’s statement contains anything close to "don’t rule out further tightening," 30-year Treasuries will reprice to 5.3%-5.4% within 30 minutes. At that point, 5.5% isn’t just a forecast—it’s the next station.

Invalidation condition: Iran talks make real progress before the June FOMC, Hormuz reopens, oil falls from $102 to below $80—May and June CPI show clear improvement, long-end rates might drop, this scenario would need major revision.

Tech stocks are second. The Nasdaq Forward PE has compressed from last year’s peak of 33x down to the 27x range, but historical averages are around 20-22x. As long as 10-year Treasuries stay above 4.5%, that’s the PE ceiling for tech. First compression is "rate-cut expectations gone," second is "rate-hike expectations revived"—we just crossed the first threshold.

Specifically: after the call, funds will zero in on any timing hint for rate cuts in Walsh’s comments. If there’s none—the base case—Nasdaq will correct into tech heavyweight stocks within 48 hours. Nvidia, Microsoft, Apple are first hit, secondary tech and growth stocks follow but are more volatile, harder to predict direction.

Gold is most ambiguous in this framework. In theory, real rates rising are bad for gold, but real rates = nominal minus inflation expectations—if markets start worrying about Fed independence, inflation expectations may rise, offsetting the negative for gold. Add ongoing US fiscal deficits and foreign central bank "de-dollarization" gold buying—gold might see "rates up but price doesn’t fall." Not a main scenario, but worth watching.

Dollar is more straightforward: revived rate-hike expectations → stronger dollar. But if markets decide Fed independence issues are becoming structural, this logic could weaken.

The Most Important Thing Before June 17

Progress in Iran talks is the biggest variable in all this.

Iran FM Araghchi said last week the deal is "inches away"—but he also said "totally distrusts Americans." Trump halted planned military strikes on Iran May 19, citing "serious negotiations ongoing." But Hormuz remains under control, the handover of 40kg of highly enriched uranium unresolved.

If talks break down before June 16, oil returns to $110+, May CPI likely beats expectations again, and Walsh’s first FOMC faces the worst scenario. If breakthrough before then, oil falls, inflation data improves, the "Walsh cornered" narrative softens.

The former is negative for bonds and tech, the latter gives Walsh a temporary breathing space—but even so, the stickiness of service inflation won’t disappear, at best postpones the issue a few months.

June 17

The most important Fed calendar date this year: June 17, 2:30pm—Walsh delivers his first FOMC statement and answers reporters.

Every word will be analyzed repeatedly: does he use "patient" or "vigilant," does he mention rate hikes, how does he describe the persistence of inflation, how does he answer "what’s your conversation with Trump like" type questions.

The answers will tell the market how wrong it priced Walsh and how long it will take to correct that error.

Risk Disclosure and DisclaimerThe market is risky and investment needs caution. This article does not constitute personal investment advice and has not considered individual user's specific investment objectives, financial situations, or needs. Users should consider whether any opinions, views, or conclusions herein are suitable for their own circumstances. Investment based on this is at your own risk. ```