Memo to Kevin Warsh, Re: The Job You Actually Got

INTERNAL. NOT FOR DISTRIBUTION. SHRED AFTER READING.

Markets · June 5, 2026

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TO: K. Warsh, Chair, Federal Reserve System
FROM: Reality
RE: The situation as it actually stands
DATE: Your first real week in the building

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Congratulations on the confirmation. The Senate moved faster than anyone expected, Jerome Powell is politely keeping his head down as a lame-duck governor, and the president is presumably waiting by the phone for the rate cuts he was promised.

Here is what you inherited.

Inflation is running at approximately 3.9% on the PCE. That is nearly double the Fed's 2% mandate — a mandate which, as you are aware, is the only reason the institution you now lead has any legal basis for setting the price of money for the largest economy in human history. The FOMC's June 17-18 meeting is eleven days away. The CME FedWatch tool currently prices a 40% chance of a rate hike by December. Forty percent. Not a cut. A hike. The market is telling you, politely, that the math doesn't work.

The president wants lower rates. The data wants higher rates. You are the man standing between those two sentences, and neither of them is going to move.

You were nominated to replace Powell partly because the White House decided Powell was too stubborn about independence. The irony is that the economy handed you Powell's problem — an inflation overshoot, a divided FOMC, and a set of external shocks that would have made Powell look indecisive too. The difference is that nobody expected Powell to be a team player. They expected you to be.

Let us walk through the shocks.

Brent crude peaked above $119 this year, after the U.S. opened hostilities with Iran in late February and the Strait of Hormuz went from a chokepoint to a hostage. The strait handles roughly 20% of global crude and LNG flows. For two months, essentially nothing moved through it without Iranian military clearance. One tanker transited in the first 24 hours of the initial ceasefire. One.

The ceasefire has since become a rolling series of near-misses, extensions, and bilateral accusations of violation. As of this week, Brent is trading around $92-93 — off nearly 20% from the peak, which sounds like good news until you remember that it was trading at roughly $67 a barrel before the bombing campaign began. The "relief" in oil prices is a 20% drop from a war premium. The underlying level is still elevated. The inflation transmission from that four-month energy spike — into freight, food, chemicals, everything that moves — is still flowing through CPI prints with the usual six-to-nine month lag.

Meanwhile, the equity market has been making new all-time highs. The S&P 500 posted a 5.3% return in May. The Dow touched 51,657. The Nasdaq is up 25% quarter-to-date. This is the market telling you there is no recession coming, no credit event, no demand destruction severe enough to worry about. What it is not telling you — because markets are famously bad at this — is whether those gains are real or whether they are a leveraged bet that you, personally, will blink first and cut rates before you should.

Because that is the trade. Not "the economy is strong." The trade is "Warsh will cut because Trump will make him." The S&P 500 at 7,600 has priced in monetary accommodation that has not happened yet and may not happen at all.

There is a version of 2026 in which the Fed does nothing until December, the ceasefire in the Gulf holds, oil drifts back toward $80, inflation cools, and you get to claim credit for patience. There is another version in which one Iranian speedboat does something ill-advised in the Hormuz approaches and Brent is back at $110 before you've finished your morning brief.

The market is pricing the first version. It has been wrong before.

What makes the situation genuinely unusual — not merely complicated — is the structural position of the consumer. Savings rates are falling. The University of Michigan consumer sentiment gauge is at record lows. Job cut announcements rose to 97,000 in May, the highest for that month since 2020, now three consecutive months of increases. These are not recessionary numbers. They are weakening-economy numbers, the kind that ordinarily push a Fed chair toward accommodation. Except the Fed can't accommodate while core PCE is printing at twice target, because accommodation now means you've abandoned the mandate entirely and admitted that the 2% target was a suggestion.

Powell chose "transitory" in 2021 and spent the next two years being publicly humiliated by a CPI that wouldn't cooperate. He then chose aggressive hiking and broke a regional bank. You are not Powell. You have the advantage of watching him. You also have the disadvantage of having publicly criticized him for years, which means every decision you make will be read as a verdict on his legacy, and by extension as a justification or repudiation of your own past positions.

The June 17 meeting will be your first real test. The room will be watching to see whether you run the institution or whether the institution runs you. The governors who want to hike are not irrational — the data gives them cover. The governors who want to wait are not irrational either — the geopolitical situation gives them cover. What nobody in that room is going to do is tell you what the right answer actually is, because nobody knows, and that uncertainty is now your problem to project confidence through.

One more thing. The SpaceX IPO is pricing next week at something approaching $2 trillion. The company lost $4.3 billion in Q1. The AI infrastructure buildout is absorbing $800 billion in capital expenditure this year at a rate that is consuming 94% of hyperscaler cash flow, per PIMCO. Alphabet just raised $84.75 billion in equity — the largest offering in history — because it says its AI supply can't keep up with demand. CrowdStrike beat earnings and fell sharply. Broadcom guided for AI revenue to triple in a quarter and lost 14% in a session.

None of this has anything to do with monetary policy. And all of it does. The equity market is functioning as a consensus machine for the AI narrative, and the AI narrative is predicated on a soft landing, stable rates, and no geopolitical shocks that redirect capital to defense, energy, or cash. If any one of those assumptions breaks, you will hear about it in the fed funds futures market approximately four seconds before you hear about it anywhere else.

The rate cuts can wait. So can the president. The Strait of Hormuz cannot.

Good luck.

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Data: CBS News, CNBC, CME FedWatch, EY-Parthenon, FactSet, Goldman Sachs, James Investment Research. All figures current as of June 4–5, 2026.