Nomura economists say Fed Chair Kevin Warsh's new inflation-tracking gauge predicts price growth no better than core inflation readings, undercutting the framework behind his price-stability pledge. Warsh's first FOMC statement called the commitment to deliver price stability "strong, unanimous, and unambiguous," while he declined to publish an individual dot-plot forecast.
Nomura economists say the alternative inflation measure Kevin Warsh has built his price-stability pledge around predicts price growth no better than the core readings it is meant to replace, a finding that lands days after the new Fed chair's first policy decision and puts the credibility of his framework in question.
"The new gauge does not have better predictive power than core readings," Nomura's economics team wrote in a note dated Sept. 23, according to MarketWatch, which reported the critique. The firm did not publish a revised rate path alongside the assessment.
The critique matters because Warsh has tied his tenure to the measure. In his first statement as chair, the Federal Open Market Committee declared that it "will deliver price stability," language Warsh described at his press conference as "strong, unanimous, and unambiguous," adding that the commitment is "something we've missed for five years, and we're going to fix that." He also declined to publish an individual rate forecast in the Fed's dot plot — the quarterly chart of each official's projected policy rate — and said the central bank's communications strategy could face a broader review, a shift the Financial Times framed as "the dying days of the Federal Reserve's dot plot."
If the gauge cannot out-forecast core inflation, the market has less reason to treat its signals as information, which weakens the transmission channel Warsh is relying on. The Fed's policy rate level, the vote split on his first decision, and the date of the next FOMC meeting were not yet disclosed in the source material.
Bond investor Jeffrey Gundlach read the same decision in the opposite direction. The DoubleLine Capital chief executive said on X that inflation risk had displaced artificial intelligence as Wall Street's dominant story, and shared a chart comparing ISM Prices Paid, a gauge of inflation pressure facing businesses, with ISM Employment. The latest reading sits closer to the Arthur Burns era of the 1970s, when inflation stayed persistently high, than to the Paul Volcker years of the early 1980s, when the Fed ran a forceful campaign to curb price growth.
"He is absolutely telling you that he plans on delivering on price stability," Gundlach told CNBC. "So that means we're not going to have such easy money policy as everybody thought maybe Chairman Warsh would do back in the first quarter of this year, when everyone was counting on rate cuts." He added that Warsh "has basically announced today that he would be considered a failure" if he does not deliver something that can be characterized as price stability, and said the stance gives investors "a greater reason to own long-term Treasuries today now that the new sheriff is in town."
Equities took the message poorly. The SPDR S&P 500 ETF Trust, Invesco QQQ Trust, and SPDR Dow Jones Industrial Average ETF Trust each fell about 1% on Wednesday, with Gundlach noting it was "the first day in a long time AI is not the top story. It is the Fed." Over the past year, QQQ has led the major index ETFs with a 37% gain, while SPY and DIA have risen 25% and 24% respectively — a cushion that leaves rate-sensitive growth names most exposed if the market starts discounting the Fed's inflation signals.
Retail positioning has not followed the bond market's caution. On Stocktwits, sentiment for SPY and QQQ was bullish on normal message volume, while DIA was also bullish but drew high message volume. One user wrote that "Volcker is here to finally do what coward Powell refuses to do," while another warned of "one of the worst trading days for the Nasdaq tomorrow" and flagged that markets were closed Friday.
The practical question for rates is which reading the FOMC treats as binding when the two diverge. A gauge that tracks core inflation closely but adds no forecasting edge gives officials little cover to hold policy tighter than the data warrants, and gives investors little reason to reprice on its release. The reverse also holds: if Warsh's measure starts flagging disinflation ahead of core, and the committee acts on it, the burden shifts to proving the call was right.
That is the credibility trade Gundlach described, and it cuts both ways for duration. Long-dated Treasuries benefit if Warsh holds the line on price stability and avoids over-easing; they suffer if the framework he is using to justify that stance is judged unreliable and the Fed is seen as flying without instruments. Nomura's note is the first outside test of that framework, and it did not pass.
This article is for informational purposes only and does not constitute investment advice.
