Is the Fed done with K-shaped monetary policy?

**Darius Dale** (0:00)
Happy Wednesday out there, Team 42, it's your skipper here, Darius Dale. We'll present our Macro Minute for Wednesday, July 15th, 2026 As always, we'll start with the executive summary from today's Lit Off Morning Note, so let's dive right in. Today's key macro question is, is the Fed done with K-shaped monetary policy?
The short answer is no, but Chair Warsh's three-hour House Financial Services Committee testimony confirmed this outcome remains a key structural downside risk to asset prices, particularly the prices of gold and Bitcoin, and to a lesser degree, stocks. It remains a key structural upside risk to Treasury bond prices. In terms of the analytical nuance here, the most important things we learned regarding the evolving structural outlook for US monetary policy, and Chair Warsh's three hours of testimony yesterday, presented in order of appearance with respect to the corresponding comments from the Chair. Number one, the days of the Fed looking through, perhaps blaming supply shocks for persistent failure to achieve its price stability mandate are likely in the rear of your mirror. Number two, the Fed's balance sheet will likely transition from policymakers largely relying upon quote financial stability concerns to provide undue income support for households and businesses on the top part of the K shaped US economy to being carefully considered in the context of its price stability mandate. Number three, consistent with our Bayesian prior, a significant and protracted decline in the Fed balance sheet will not occur for several quarters, perhaps longer given the historical timeline for changes to banking sector regulation. Number four, Kevin Warsh will seek to inject the lessons of humility and forward looking data dependence that he learned from one of the all time great investors, Stan Druckenmiller, one of my favorite investors, into the Fed's reaction function. Number five, consistent with our Bayesian prior, the Fed may seek to deregulate US commercial banks in a way that passes the hot potato of marketable treasury supply exclusively to large banks which typically and overwhelmingly serve large customers. This will allow the Fed to focus incremental deregulation efforts on small banks, which would accelerate the credit impulse in the real economy, according to the similar research of Dr. Richard Warner. Obviously, we got a lot going on here today, so let me just skip to the end here.
Going to number 14, the Fed may be embarking on a long and arduous journey to rid the US economy of K-shaped monetary policy. If so, achieving this objective will be challenging and require at least the next several years to demonstrate sufficient results because of all the entrenched groupthink within and around the institution.
This is why we are such big fans of Warsh's Task Force Initiative. The chair is seeking to use the power of framing and inception to speed up this critical process. History has proven extremely unkind to societies that share our K-shaped dynamics. Pivoting the Fed away from K-shaped monetary policy will go a long way towards shutting off with Dr. Peter Turchin and his colleagues at Crisis DB describe as a wealth pump throughout their seminal research. All told, we are rooting for Chair Warsh and his colleagues at the Fed to make us wrong on our near three-year-old asset allocation view that gold is a far better portfolio diversifier than treasury bonds. Moreover, we will happily serve the Fed in any capacity if we can help the institution affect the pivot from gold back to bonds as the primary portfolio diversifier in KISS. Why?
Because a protracted plunge in the price of gold would be representative of the best possible monetary policy outcome for our ailing, K-shaped society. Historic opportunities like this require both wishful thinking and skilled risk management. Best of luck to you, Chair Warsh.
So as always, a wrap up with the question from our community. This was titled, will we ever have a recession again? It feels like the Federal Government and Federal Reserve would just print if we ever start moving towards a recession. Thus, we moved to paradigm D, print phase, which we haven't started that already, if we haven't started that already, which I believe we have tiptoed into paradigm D with the Reserve Management Purchases. Since 2009, it is likely that they made the decision to never let a recession happen again. Seventeen years is the longest business cycle that I'm aware of without a recession, as I'm not counting the temporary decline in GDP during COVID. Is my thinking crazy?
And the follow up question here from another member is a good question. And so if so, is inflation the new recession? So this is the risk in our opinion based on all the hundreds of slides of research we pump out every week and probably perhaps thousands of slides of research we pump out to institutional investors all around the world, investors all around the world every month. Our institutional clients don't see anything different from our retail clients.