Kevin Warsh took over as Fed Chair late last month, and a few weeks ago, he faced his first “test.”

He led his first FOMC meeting, where the Fed discusses the state of the economy then announces any changes to interest (if there is any) and provides guidance for future meetings.

Though the first meeting went as expected, it’s still helpful to get a sense of how Warsh thinks. That’s why we will be using our ECF tool to understand his current thinking on Fed policy.

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Kevin Warsh took over as Chair of the Federal Reserve late last month.

Warsh’s first major “test” happened earlier this month. He had to lead his first federal open market committee (“FOMC”) meeting, where the Fed discusses the state of the economy, announces any changes to interest rates, and gives some guidance for future meetings. 

All eyes were on Warsh, who was installed by President Trump because the president expected he’d work to cut interest rates as fast as possible, a measure which historically helps spur the economy and stock market.   

The first meeting went as expected: the Fed kept interest rates flat between 3.5% and 3.75%. 

That said, the market soured after Warsh delivered his first speech, which was surprisingly hawkish. The S&P 500 fell about 1% after the speech. 

Unfortunately, the Fed chair cannot speak freely. Warsh, just like his predecessor Jerome Powell, has to play the role of market diplomat. That means talking in a way that minimizes fear while slowly guiding the market’s expectations. 

To get a sense of what Warsh is thinking, we will use one of our proprietary tools to read between the lines in his speech.  

The Earnings Call Forensics (“ECF”) is a tool we run on the management team of every company we recommend. 

It uses voice-stress analysis tools to analyze management’s speech during earnings calls and presentations.

We’ve been refining this tool for over 15 years. It lets us match management’s words against their feelings and the actual numbers and forecasts. When they don’t line up, something about the company is in serious need of deeper investigation.

The ECF is a valuable way to monitor how management sentiment changes over time, especially pinpointing when the team gets excited about something. 

It’s a way for us to interpret many of those valuable nonverbal cues without having to sit in the room with management.

We run the same analysis on Fed Chairs. 

Here’s what we found for Warsh’s first speech.

On the surface, his tone was quite hawkish. He made it clear that he is focused on controlling inflation using the tools at his disposal, primarily interest rates. 

When inflation is rising, the Fed can reverse that by hiking rates. 

That makes it seem like Warsh is going to entertain rate hikes.That’s why the market panicked. 

That especially spooked the market because half of the Fed’s governors said they expect at least one rate hike this year.

That said, when Warsh was discussing his willingness to use interest rates to help bring inflation down to 2%, he generated what we call a “questionable” ECF marker. 

That doesn’t mean Warsh is lying, but it could mean he’s not saying everything on his mind.

We interpret this to mean Warsh said what he said to establish his independence from President Trump. As we mentioned, Trump nominated Warsh to cut interest rates, so by discussing his willingness to raise rates, he is gaining trust. 

Warsh also generated several questionable markers about the way the Fed forecasts its policy decisions. Fed officials each typically submit thoughts on where they think interest rates will be over the next few meetings. That gives the market some visibility into where rates might go in the future. 

Warsh doesn’t like this model, and he refused to submit his guidance. In his opinion, it forces the Fed to act in a way to appease the market. In other words, if the market expects a rate cut, it’s difficult for the Fed to do anything else or risk scaring the stock market. 

Warsh’s questionable markers were around the idea that he’s open-minded about the Fed providing guidance. 

This is as simple as Warsh not liking the idea of the Fed showing its hand. And him likely leaning into the idea that he’s going to push hard to change what the Fed does here.

Finally, Warsh generated questionable markers when talking about internal communications between members of the FOMC, specifically that he’s working to improve internal communications versus looking to opinions from external sources, such as Treasury Secretary Scott Bessent.

We know Bessent and Warsh share an agenda, and so to us, this signals that, while he may consider the opinions of his Fed colleagues, he’s already having discussions with external sources on his future policy decisions. 

It’s typical for Fed chairs to generate a lot of questionable markers. As we discussed above, part of the job is walking the tightrope of public perception. 

Warsh seemed to do a good job of establishing himself as independent from president Trump while also making it clear he’s going to operate differently than prior chairs. 

After reading between the lines, we aren’t so sure a rate hike is imminent.

Warsh isn’t going to ignore the data in front of him, but he’s also not going to commit to a path and feel forced to follow it. 

So while the Fed as a whole seemed more hawkish this meeting, Warsh doesn’t want to commit it to that path for the rest of the year. 

The market’s already expecting at least one rate hike this year, which means if the Fed does raise rates, it won’t be a big surprise. 

That said, if Warsh convinces the Fed to keep rates steady, or possibly even cutting rates, it could drive the market and economy even higher.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research