New Fed Chair Kevin Warsh Says Deflation, Rate Cuts Are Coming

0:00The president of the United States stepped up to the podium in the Rose Garden last April, and he unleashed chaos in financial markets. His announcement of sweeping tariffs on all U.S. imports sent markets into a freefall. The academic experts, they began having a panic attack. In the Internet, it exploded with various predictions of empty shelves, sky-high inflation, and the next Great Depression. Now, of course, this reaction was a complete waste of everyone's time. The stock market eventually rallied, and we got new all-time highs every few days. Those quote unquote experts, they were wrong.

0:32And investors who ignored the noise did very well. But there was one part of the mainstream analysis that seemed crazy to me at the time. Those experts, they kept promising sky high inflation from the tariffs. Actually, in fact, many of those people are still claiming inflation is coming and that the tariffs were the most inflationary policy of our lifetime. No, seriously, that is something that people are saying right now. Take a listen to the Yale Budget Labs, Natasha Saren, Say this on ABC recently. I think the impact is twofold. One is that these tariffs are the most inflationary policies that we've seen in our lifetimes.

1:07Our most recent estimates were the effective tariff rate for this afternoon's announcements was essentially 11 percent, about five times what it was when President Trump took office for a second term, is that that cost the American people something on the order of $1 ,000 plus of price increases in each year, something on the order of$30 billion less of economic growth in this country annually. Now, this type of commentary is just absurd. It's like these experts forgot that we had over 9 % inflation in this country just three or four years ago. Remember that undisciplined economic monetary policies that drove inflation to the sky?

1:44Wouldn't those policies be the most inflationary of our lifetime? I don't know. It's just an idea for Natasha and her colleagues at elite academic institutions. Maybe they should spend their time pontificating about their broken worldviews and stop worrying about being so bombastic on television. Now, I'm only being so harsh on these folks because it was very obvious last year that tariffs were not going to create sky high inflation. As I tweeted multiple times during April 2025, I felt strongly that deflation was a much bigger risk than inflation. One tweet on April 10th, 2025 read, all the consensus seeking finance folks told you that tariffs are inflationary, but I will continue to point out that the much bigger risk is deflation.

2:25I still stand by that statement today, but you don't have to believe me anymore, nor do you have to listen to me say it. Kevin Warsh, the next Federal Reserve chairman, was on CNBC recently, and he explicitly stated his belief that technology was going to bring structural price decline and that deflation was a serious risk that the Fed should prepare for. Take a listen to what Warsh had to say. What we call AI in a couple of years, we'll just call business. And AI is going to make almost everything cost less. And the U.S. can be a big winner. And it's a hugely exciting moment. If I were to step back for a minute, if I were the president, what I'd be worried about is a central bank that doesn't see any of that.

3:06A central bank that is stuck with models from 1978, governance from a prior period, and don't recognize we could be at the front end of a productivity boom. boom and if I were the president I'd be worried that they might not see it and they might think economic growth is somehow going to be inflationary I think we were probably in the early innings of a structural decline in prices Ken sees it on the front lines of real businesses and I think if you look over the period of the next year or two it's a pretty special moment now AI is going to make everything cost less we could be at the front end of a productivity boom and we are probably in the early stages of a structural decline in prices.

3:45These are sentences being said on national television from the man who will be in charge of America's central bank. If you don't clearly see that the Fed's going to continue to cut interest rates in the coming months and years, I'm not sure if there's any piece of information I could tell you that's going to convince you of that. Now, some of you are going to claim that Warsh is merely a Trump puppet, that he only knows he's got to cut rates to avoid conflict with the president. Others of you are claiming that short-term price increases in oil or longer-term price increases in commodities are going to lead to higher levels of inflation, and that would prevent the Fed from aggressively cutting interest rates.

4:19Now, on the first point, I have no clue what Warsh's politics are, nor do I have any idea how he's going to interact with the president. We're just going to have to wait and see on that critique and to see what actually ends up being true. But regarding higher inflation, it is fairly obvious to me that deflation remains a much bigger risk than inflation for the U.S. economy. Are oil and gas prices up? Yes, absolutely. Are commodity prices up? Yes, absolutely. But the U.S. economy is much more dependent on technology than it's ever been. And that's important because technology has been significantly reducing the price of a plethora of goods and services across the economy.

4:54That structural decline in prices that Warsh mentioned, it's widely misunderstood. For example, take Jeff Booth. Jeff Booth has said before that the natural state of a free market is deflation. Prices fall to their marginal cost of production. If Jeff's right, and I believe that he is right, then we should expect prices to continue falling, especially as AI and robotics accelerate. We are automating the American economy. Now, intelligent critics of this worldview are gonna immediately point that the US government's printing money, the national debt continues to get worse, and inflation has almost always followed those types of undisciplined spending habits.

5:30I don't disagree on history. History does show us that inflation would usually occur from all that spending. The difference in this moment, though, is that the deflationary forces that are swallowing the U.S. economy, like tariffs, deportations, AI, and robotics, they are working together to bring an incredibly strong force into the economy. Elon Musk has previously said that the U.S. government won't be able to print enough money to overcome the deflationary force. It's a big idea. And I know that sounds crazy. It actually feels weird for me to say. But the more I look at the data, the more I believe this perspective to be true.

6:04Deflation is the bigger risk than inflation. Now, one of the first big tests for this thesis was the tariffs last year. The market expected high inflation, but the deflationary forces prevented the high inflation from ever showing up. And I think that's a big reason why asset prices sold off towards the end of last year and into the beginning of this year. Now, the second big test of this thesis will be in the coming two to three months. Most investors believe inflation is gonna surge higher. Things like CPI readings, they believe that those readings will be over 5 % year over year. But when I look at measurements like truflation, it suggests that CPI is going to remain much more subdued than people expect.

6:39If we don't see CPI fly higher over 5%, then it's going to be pretty clear to people paying attention that the deflationary forces are having an outsized impact on the economy. And then lastly, the third and final test of our thesis is whether we will actually see consumer prices start to fall in a material manner. It's not good enough if consumer prices just stop going up. That's nice, but it doesn't provide the type of deflationary pressure that makes life more affordable. If prices just remain flat, it only ensures life is not getting more unaffordable, but we need prices to come down. So if prices start to come down for the American consumer, that's when the economy could hit an economic golden age.

7:18This is what would allow for a high growth, low inflation environment, which is quite literally the dream of central bankers around the world. Every American should be praying for the AI companies and the robotics companies to usher in an aggressive deflationary force that would improve affordability and it would ensure GDP growth as well. If we can get that done, every politician, central banker, and regulator, they will look like absolute geniuses. Who cares which bureaucrat takes credit for the economic win? I don't, you probably don't either. The American people simply want lower prices and they wanna be able to pursue economic prosperity.

7:52Let's just hope that we get everything we're dreaming of. But part of that economic prosperity is the stock market performance so far under the current administration. Bespoke Invest points out that the S &P has gained essentially the exact same amount at this point during Trump's first and second term. In the first 317 trading days into Trump's first term, we were plus 17.6%. Today, 317 trading days into Trump's second term, we're at plus 17.8%. It's pretty crazy to see almost the identical number eight years apart. But this brings me back to the major point. Everyone has been paying attention to what Jerome Powell thinks, what the FOMC is going to do.

8:32But there is about to be regime change in terms of the leadership of the central bank. Kevin Warsh is coming in to run the Federal Reserve. I know he's still got to be confirmed. I know that they're still part of the process. But if Kevin Warsh steps into that role, he's openly telling you on national television that he believes that deflation is a serious risk. The Federal Reserve must start paying attention to it. and that he believes that interest rates need to be lower. Are short-term oil prices going to have an impact? Sure, we're seeing gas up. We're seeing many people worried about it. But ultimately, short-term ramifications are going to be drastically outweighed by the long-term structural situation the United States is facing.

9:14Almost every day, we are seeing companies report that they are creating deflation for their customers, for their employees, or in their industries. And as this starts to get more widely adopted across everything from consulting firms to technology to manufacturing and to various hardware companies, we are going to continue to see AI and robotics specifically create that deflation. And what you as an investor have to do is start thinking to yourself, what assets are likely to benefit from deflation? What assets are likely to benefit in a world of abundance? my guess is scarcity is going to become very important.

9:53In a world where the cost of producing things goes towards zero, that means that we will have an abundance of intelligence, an abundance of content, an abundance of companies, and an abundance of revenue. And so the question becomes, what is actually scarce? What is defendable? And what is going to persistently have value over the coming decades? Bitcoin is one of those things, but there's going to be many others. And so you as an investor, you've got to put your thinking cap on. You've got to be able to think about what exactly is going to happen in the world and how can I position my portfolio to benefit from it.

10:27It's what I'm spending a lot of my time doing. And I think that if you do that, you're going to be very happy over the next decade or so. That's it for today's show. Thank you guys so much for watching. Please remember to subscribe on YouTube and I'll see all of you live from the desk of Anthony Pompliano tomorrow.