Written by: Tide Research

Author: Rita

Tide Research Overview

Morgan Stanley's Chief Global Economist Seth B. Carpenter commented on the first FOMC meeting of the new Federal Reserve Chair Kevin Warsh in the report titled "Sunday Opening" published on June 21. The report asserts that Warsh deliberately does not provide guidance on the interest rate path, which aligns with his personal philosophy; however, market expectations for a rate hike this year have instead been reinforced. More concerning signals are found in two areas: inflation may decline more than expected, and the scale of balance sheet reduction may be larger than imagined. This is suitable reading for investors interested in the Fed's policy path and macro trading logic.

Three Key Conclusions

① Warsh's first meeting did not provide a roadmap for interest rates, which in itself is a signal.

Carpenter points out that Warsh intentionally reduced "forward guidance," which is consistent with his philosophy. The plain statement in the FOMC's announcement, "the Committee will achieve price stability," sounds resolute but does not indicate the path. The dot plot shows that FOMC participants predict only one rate hike this year. Carpenter calculated: if one more person removes that rate hike, the median becomes no rate hike. The core inflation forecast for 2026 is 3.3%; however, Carpenter believes the tariff effect on prices has mostly been released, and inflation is likely to remain below expectations for the remainder of this year. If inflation indeed declines more than expected, and the dot plot indicates a rate cut next year, then the logic of raising rates once this year does not hold up.

② The path of balance sheet reduction may be more aggressive than the market thinks, but the impact may not be as large as imagined.

Warsh's stance on balance sheet reduction has long been clear. Carpenter notes that simply halving the balance of the U.S. Treasury's accounts could shrink the Fed’s balance sheet by about $500 billion with almost no impact on the market. Additionally, with lower interest payments on certain reserves and adjustments in liquidity regulatory requirements, banks' demand for reserves will decrease, making the space for balance sheet reduction larger than the market expects. Carpenter judges that the ultimate scale of balance sheet reduction may exceed most expectations, but the market impact may be less than many concerns, except if the Fed actively sells mortgage-backed securities (MBS).

③ The Fed's core framework is being re-examined, but the 2% inflation target will not change in the short term.

Warsh announced the establishment of a special task force to review the policy framework, but Carpenter emphasizes that the 2% inflation target has been reaffirmed. Notably, the inflation-protected securities (TIPS) market has already identified differences between the personal consumption expenditure price index (PCE) and the consumer price index (CPI) that the Fed is monitoring. Whether this will lead to "moving the goalposts" is still unclear, as there are no clear signals yet. Another key change is in communication style: this FOMC statement has been significantly streamlined and rearranged, but Carpenter points out that this is not unprecedented; before 1994, the Fed did not issue post-meeting statements at all. As for the elimination of forward guidance, Carpenter believes its significance has been overstated, as its true value only becomes apparent when interest rates are near zero.

Has the Market Really Understood Warsh's "De-Guidance" Philosophy?

This FOMC statement has been significantly streamlined and structurally rearranged, appearing as a radical change to the outside world. However, Carpenter reminds that this is not the first time the Fed has adjusted its communication style; before 1994, the Fed did not issue post-meeting statements at all. Since then, the length and content of statements have undergone multiple changes, sometimes lengthening and sometimes shortening.

Regarding the removal of forward guidance, Carpenter believes its impact has been exaggerated. Economists have long pointed out that the real value of forward guidance only works when interest rates are near zero. When interest rates are in a normal range, the market is more focused on the dot plot and the economic data judgments in officials' speeches. Warsh's adjustments are more of a formal return to tradition rather than a substantial shift in the policy framework. Carpenter also noted that the market views Fed officials' speeches as commitments, while the officials themselves see them only as conditional views on the data; this misalignment is the real source of communication problems.

Which is More Worth Watching: Rate Hikes or Balance Sheet Reduction?

Carpenter's core judgment is that the change in the interest rate path may not be that significant, but the balance sheet reduction path may exceed expectations.

The logic of a rate hike has a contradiction: if inflation truly declines below expectations as he anticipated, and the dot plot indicates a rate cut next year, then what is the significance of raising rates only once this year? Carpenter implies that the market's panic over rate hikes may be excessive.

The situation is different for balance sheet reduction. Warsh's preference for balance sheet reduction is definite, and Carpenter provides a specific path: reducing Treasury account balances, adjusting reserve rates, modifying liquidity rules—these actions can compress the balance sheet to a significantly lower level without disturbing the market. The only exceptional risk is if the Fed actively sells MBS, which is a genuinely potentially volatile variable.

What is the Market Debating?

The biggest disagreement in the market is not what Warsh said, but what he did not say about two matters.

One is rate hikes. The FOMC dot plot shows one hike this year. But Carpenter's logic is that if inflation truly declines below expectations, then this hike is neither necessary nor does it align with the forecast of rate cuts next year.

The second is balance sheet reduction. Warsh's preference for balance sheet reduction is definite, and the path is clear. But Carpenter believes that the market impact may be overestimated, except for one exception: if the Fed actively sells MBS.

The answers to these two debates depend on three data points: whether subsequent core PCE consistently stays below 3.3%, when the Fed will provide a specific path for balance sheet reduction, and what direction of reform recommendations the policy framework review task force will put forward.

Disclaimer

This article is a整理与解读 of research reports from third-party brokerage firms by Tide Research. The views and forecasts expressed are solely those of the analysts of the respective institutions, do not represent the views of Tide Research, nor constitute any investment advice.

Macroeconomic forecasts are highly dependent on subsequent data and will be adjusted as inflation, employment, and other indicators change. The judgments made in this article reflect the analyst’s views at a specific point in time and do not represent definitive conclusions.

The market carries risks, and decisions should be independent. This article should not be used as a basis for buying or selling any securities.

Data Source: Morgan Stanley Research Report (Seth B. Carpenter, June 21, 2026) · Federal Reserve FOMC Statement and Dot Plot

Tide Research · TideResearch · June 2026