Goldman Anticipates Fed's Warsh: High Rates Until 2027, Markets Undervalued on the Pivot

Context

Since taking office at the Fed, Kevin Warsh has sent clear signals of monetary orthodoxy. His first FOMC reaffirmed the Federal Reserve's institutional independence from Trumpian pressures, while signaling a high tolerance for prolonged restrictive rates. Goldman Sachs now incorporates this stance into its rate models.

Data

Current Fed Funds rate: 4.25-4.50% (June 2026 FOMC). Revised Goldman forecast: first cut pushed back to Q2 2027 (previously Q4 2026). US real rate (10-year TIPS): +2.1%, highest since October 2023. Market probability of a cut before end-2026 (Fed futures): 32% vs. 58% a month ago. US 2s10s spread: -18 bps, curve still inverted.

Analysis

Warsh has fundamentally repositioned the Fed into a "higher for longer 2.0" mode. Where Powell navigated with reactive data-dependence, Warsh expresses a doctrine: services inflation (currently +4.1% YoY) justifies prolonged restriction, regardless of executive pressures. Goldman draws two conclusions: 1) markets have too quickly priced in a 2026 pivot; 2) the Fed/ECB monetary policy gap is widening, supporting the dollar and weighing on emerging market assets.

Probability-weighted scenarios

• Goldman's central scenario (60%): First Fed cut in Q2 2027; real rates maintained positive; Dollar Index between 105 and 110; continued pressure on long-duration valuations.
• Early pivot (25%): Rapid employment deterioration (NFP < 50K) or credit crisis forces the Fed to cut as early as Q4 2026; sharp bond rally.
• Hawkish escalation (15%): Inflation resurgence (energy, tariffs) leads Warsh to consider a hike: major bond shock, 2s10s spread plunges to -60 bps.

Portfolio implications

Long duration (10-30 year Treasuries) remains under pressure. Financials benefit from high rates (wider NIMs). A strong dollar weighs on emerging market local-currency sovereign bonds. On equities, prefer sectors uncorrelated with rates (energy, defense, healthcare) over growth tech stocks.

Risks & blind spots

The Warsh-Trump tension is a rare institutional risk: a Fed governance crisis would send the dollar plunging and spreads soaring. Additionally, Warsh may surprise with flexibility if data deteriorates faster than expected.

To watch

Warsh's post-FOMC speech (July); July 4 NFP; June 26 PCE; Goldman's consensus revisions on 2027 Fed Funds.