Key points:

• Kevin Warsh aims to break away from the ultra-protective Fed era: less intervention, reduced communication, and greater reliance on market discipline.
• Markets could become more volatile, particularly in bonds and equities, as investors may no longer rely as heavily on the Federal Reserve “safety net.”
• Warsh places strong emphasis on artificial intelligence and productivity gains as a potential offset to inflationary pressures without undermining U.S. growth.
• From an investment perspective, this regime shift may be associated with a greater focus on financially solid companies and shorter-duration exposures, alongside more active risk management.

On Friday, May 15, 2026, a new chapter began at the U.S. Federal Reserve. Jerome Powell, who had guided U.S. monetary policy through the pandemic, post-COVID inflation, and unprecedented political tensions with the White House, handed over leadership to Kevin Warsh. The swearing-in ceremony took place at the White House (the first since Alan Greenspan in 1987), highlighting the political significance of the appointment under President Donald Trump. For investors, this transition could represent a meaningful turning point. Behind Warsh’s appointment lies a simple idea: markets should gradually relearn how to function with less reliance on central bank support. 

Who is Kevin Warsh?

Kevin Warsh is a well-known figure on Wall Street. A former Morgan Stanley banker and graduate of Stanford and Harvard, he previously served on the Board of Governors of the Federal Reserve between 2006 and 2011. During the 2008 financial crisis, he played a key role in discussions between the Fed and major U.S. banks. However, it was his departure from the institution that attracted significant attention. In 2011, Warsh left the Fed in disagreement with Ben Bernanke over the large-scale monetary stimulus programs introduced after the crisis. Since then, he has repeatedly criticized markets’ dependence on persistent central bank intervention. In his view, the Fed has become overly influential:

• it has an outsized impact on financial markets;
• it may reduce market discipline by cushioning corrections;
• and it may have contributed to inflated asset prices.

His current objective is to reduce the Federal Reserve’s footprint on the economy.  

Economic vision and the idea of “regime change”

Kevin Warsh himself refers to a “regime change.” This concept reflects three main departures from the Powell era.  

1. A less communicative and less predictable Fed.

Since 2008, the Federal Reserve has adopted increasingly transparent communication, with investors often guided in advance through press conferences, economic projections, and the well-known “dot plots.” Warsh believes this high level of transparency may have created an unhealthy dependency of markets on central bank guidance. He would aim to:

• reduce forward guidance;
• limit pre-announced policy signaling;
• increase uncertainty in markets.

In other words, investors may need to adapt to a more unpredictable environment, potentially implying higher volatility.

2. Faster reduction of the Fed balance sheet.

Since the 2008 financial crisis and the COVID period, the Fed has accumulated approximately $6.7 trillion in assets, mainly U.S. Treasuries and mortgage-backed securities. For Warsh, this large balance sheet represents an anomaly. Rather than selling assets aggressively, the approach would likely involve:

• allowing long-dated bonds to mature naturally;
• reducing reinvestments;
• favoring short-term securities.

The key implication is that private investors would need to absorb a larger share of U.S. debt issuance if the Fed steps back gradually from bond markets. As a result, long-term yields could remain under upward pressure. The 30-year U.S. Treasury yield has already exceeded 5.15%, a level not seen since before the 2008 financial crisis.

3. A less interventionist central bank Warsh advocates for a Federal Reserve that “does less,” with reduced involvement in financial markets and less inclination to intervene during periods of turbulence. This represents a clear departure from the post-2008 policy framework. The underlying argument is that if investors expect the Fed to consistently act as a backstop for markets, they may be incentivized to take on higher levels of risk.

Warsh’s major bet: artificial intelligence

One of the most distinctive elements of Warsh’s outlook concerns artificial intelligence. He suggests that AI could have an economic impact similar to the internet in the 1990s:

• significant productivity gains;
• lower production costs;
• improvements in supply chains and industrial efficiency;
• sustained growth without persistent inflationary pressure.

This assumption is a central pillar of his macroeconomic thinking. According to this view, if AI materially increases U.S. productivity, the Federal Reserve could potentially reduce interest rates more quickly without reigniting inflationary pressures. Warsh often references Alan Greenspan, who was among the early policymakers to recognize the transformative impact of the internet in the 1990s. However, this outlook remains widely debated. Some economists argue that the actual productivity impact of AI may be more limited than expected, while others caution against basing monetary policy assumptions on highly uncertain technological projections.

Warsh vs Powell: key differences

Jerome Powell led the Federal Reserve through eight years marked by major economic shocks. His approach emphasized predictability, consensus-building, and extensive communication. He institutionalized post-FOMC press conferences and expanded the use of “dot plots” to guide market expectations. His relationship with President Donald Trump was often tense, as the president publicly criticized the Fed for not cutting rates more aggressively. Powell, however, maintained a consistent policy stance throughout his tenure. Warsh represents almost the opposite approach in terms of communication style. He tends to favor less predictability, more surprise, and a less consensus-driven process. However, despite methodological differences, markets do not necessarily expect an immediate policy shift. In the current inflationary environment, Warsh is widely expected to adopt a similarly hawkish stance (focused on controlling inflation), potentially even more so than Powell.

Macroeconomic backdrop: an entry into a challenging environment

Warsh begins his tenure in a complex macroeconomic context. The U.S. economy is facing multiple sources of pressure: Inflation remains sticky. In April 2026, the Consumer Price Index (CPI) rose by 3.8% year-over-year, the highest level in three years. Producer prices (PPI) increased by 6% month-over-month, driven largely by energy costs. The Federal Reserve’s inflation target is 2%, leaving a significant gap between actual and target levels. This environment complicates the monetary policy outlook, as it is unclear to what extent inflation pressures are cyclical or structural. 

Energy shock The conflict between the United States, Israel, and Iran has driven oil prices sharply higher. This shock is transmitted across the economy through higher transportation costs, industrial input prices, and heating expenses. It complicates the inflation outlook: whether this represents a temporary shock or a more persistent inflationary pressure remains uncertain. Long-term yields rise The 30-year U.S. Treasury yield has moved above 5.15%, a level not seen since before the 2008 financial crisis. This increase reflects both persistent inflation concerns and shifting expectations around Federal Reserve policy direction. Labor market remains resilient The unemployment rate stands at 4.3%, historically low by long-term standards. This reflects continued economic resilience but may also support the case for maintaining tighter monetary conditions for longer. The current environment places Warsh in a complex position: markets anticipate potential policy tightening, political pressure from the White House favors rate cuts, and inflation remains above target. This combination may increase uncertainty around the Federal Reserve’s policy path.

What this means for investors

The following section describes a hypothetical market scenario based on current assumptions. It is provided for informational purposes only and should not be interpreted as a forecast or investment recommendation. Actual outcomes may differ significantly. Bonds: interest rate sensitivity remains high Fixed income assets may remain sensitive to changes in interest rate expectations. Long-duration bonds, in particular, tend to be more exposed to yield fluctuations. Historically, long-term bonds have benefited from sustained central bank support. A gradual reduction of this support could increase volatility in bond prices. Shorter-duration instruments are sometimes viewed by market participants as potentially less sensitive to interest rate risk, although they may offer lower yield potential depending on market conditions. Equities: a more differentiated environment Equity markets may enter a more selective phase. Companies with strong balance sheets, stable profitability, and pricing power could prove more resilient under tighter financial conditions. By contrast, highly leveraged firms or those dependent on persistently low interest rates may face greater sensitivity to financing conditions and valuation adjustments. Market reactions may also become more sensitive to macroeconomic data releases and central bank communications. U.S. dollar: potential support scenario While U.S. policy preferences may vary, a more restrictive monetary stance could support the U.S. dollar through higher real yields, which generally attract international capital flows. A stronger dollar may help reduce imported inflation but could also weigh on the competitiveness of multinational U.S. exporters. Gold: short-term pressure, longer-term uncertainty Gold, often viewed as a defensive asset, benefited in 2025 from a weaker dollar and elevated geopolitical tensions. A stronger dollar and higher real interest rates may reduce its relative attractiveness in the short term, as gold does not generate yield. However, in a scenario of persistently high inflation or renewed geopolitical escalation, demand for defensive assets could increase again.

Scenarios for the coming months

The following scenarios are illustrative and depend on inflation dynamics, geopolitical developments, and Federal Reserve policy choices. Outcomes are uncertain and subject to change. Base scenario: hawkish status quo The Fed keeps rates between 3.5% and 3.75% through 2026. Warsh gradually establishes policy credibility without abrupt shifts. Inflation moderates but remains above 3%. Markets adjust to a regime of lower guidance and higher volatility, with long-term yields stabilizing in a higher range. Upside scenario: AI-driven disinflation Artificial intelligence leads to stronger productivity gains and easing supply-side pressures. Inflation falls below 3% by late 2026. This environment could allow for gradual policy easing, supporting both equity and bond markets. Downside scenario: stagflation risk Geopolitical tensions intensify, oil prices rise above $120 per barrel, and inflationary pressures persist. The Federal Reserve may be forced to maintain or tighten policy further. In this scenario, equity markets could weaken and yields could rise further.

Key risks to monitor

1. Monetary policy error risk An overly rapid reduction in central bank support could tighten financial conditions more than expected, increasing volatility across asset classes. 2. Persistent inflation Energy markets remain a key uncertainty. Sustained geopolitical tensions could prolong inflationary pressures and delay any policy easing cycle. 3. Political pressure on the Federal Reserve Tensions between the White House and the Federal Reserve may increase policy uncertainty. Markets may react to perceived risks to central bank independence. 4. AI productivity assumptions The macroeconomic narrative partly relies on assumptions about artificial intelligence-driven productivity gains. If these effects materialize more slowly than expected, inflation could remain elevated for longer than anticipated.

Conclusion

The appointment of Kevin Warsh as head of the Federal Reserve may represent a structural shift in market expectations. After a long period characterized by low rates and frequent central bank intervention, the policy environment may evolve toward reduced monetary support and greater market sensitivity. This transition could result in higher volatility and a more selective investment environment, where fundamentals and financial resilience play a greater role in asset performance outcomes.

This content is provided for marketing and informational purposes only and does not constitute investment advice. Trading financial instruments involves risk, including the potential loss of capital. Past performance is not indicative of future results.

Financial instruments mentioned in this content may be issued by a partner from whom Saxo receives promotional fees, payments, or rebates. While Saxo may receive compensation under such arrangements, all content is produced to provide clients with useful information and perspectives.

Dorian Anglada

Investment Analyst

Saxo Bank

Options Brief - AI rally, summit day two - 15 May 2026

Thursday’s session closed at all-time highs on AI earnings and summit optimism; Friday brings caution as Trump and Xi enter the second and final day of their Beijing talks.

Cisco surged 13% after a strong earnings beat and job cut announcement, Nvidia extended its run, and summit-day-one optimism around the Trump-Xi meeting in Beijing pushed the S&P 500 to a new all-time closing record above 7,500. Heading into Friday, the mood has shifted. The KOSPI fell nearly 4% in the live Friday session, US futures are pointing modestly lower, and Xi’s Wednesday warning that mishandling Taiwan could lead to “conflicts” is hanging over the second and final day of talks. The options market is split: equity sentiment is historically call-heavy, while the VIX term structure is quietly steepening toward June.

Market snapshot

All equity and index values are Thursday 14 May closes. Futures and Asian market values represent live prices at approximately 6:10am Brussels/Copenhagen time on Friday 15 May. European markets had not yet opened at time of writing.

• S&P 500: 7,501.24, +0.77% (new all-time closing record)
• Nasdaq 100: 29,580.30, +0.73%
• Dow Jones Industrial Average: 50,068.02, +0.74% (back above 50,000)
• DAX / Euro Stoxx 50: 24,456.26 (+1.32%) / 5,934.97 (+1.26%) (Thursday closes)
• US 10-year yield: 4.52%, up 8.3 basis points on the Thursday session
• S&P 500 futures / Nasdaq 100 futures: –0.33% / –0.52% (live at 6:10am CEST)
• KOSPI: –3.94% (live Friday session)
• Market regime: Low vol bull – VIX 17.3 (Thursday close), 20-day realised vol 10.0% (decreasing), S&P 500 +8.56% above its 50-day moving average

Options angle

The CBOE Volatility Index closed Thursday at 17.26, down 3.41% on the session, confirming the low-vol bull regime. Front-month VIX futures moved in the opposite direction, gaining 1.03% to 20.75, pushing the spot-to-futures gap to roughly 3.5 points. The VIX 3-month-to-spot ratio stands at 1.21, meaning the futures curve is notably steep: near-term calm is fully priced in, but June carries a meaningful uncertainty premium that spot VIX alone does not capture.

The CBOE SKEW index, which measures the premium investors pay for out-of-the-money downside protection relative to equivalent upside exposure, remains elevated at 139.32 despite a 1.55% pullback on the session. Elevated SKEW keeps put options structurally more expensive than equivalent calls. The CBOE S&P 500 equity put/call ratio (PCCE), which tracks protective put activity relative to bullish call activity on individual stocks, fell to 0.536 on Thursday – an unusually low reading consistent with a market leaning heavily on calls for upside exposure. When equity options positioning tilts this far toward calls, market makers typically carry elevated short-gamma exposure, meaning they are forced to buy on rallies and sell on declines, amplifying directional moves in both directions. A negative or ambiguous summit conclusion, a Taiwan headline, or a further rise in US yields could trigger rapid de-hedging and a sharper-than-expected move.

Important note: The strategies and examples provided in this article are purely for educational purposes. They are intended to assist in shaping your thought process and should not be replicated or implemented without careful consideration. Every investor or trader must conduct their own due diligence and take into account their unique financial situation, risk tolerance, and investment objectives before making any decisions. Remember, investing in the stock market carries risk, and it’s crucial to make informed decisions. Strategy insight – Call spreads over outright calls. With SKEW at 139 and VIX spot at 17.26, call options are structurally cheaper than puts right now. Buying a call spread on the S&P 500 – purchasing a call at a lower strike while selling one at a higher strike – captures bullish directional exposure at a meaningfully lower net premium than an outright call. The elevated put skew makes the short call leg relatively inexpensive, improving the spread’s risk/reward further. This structure suits a scenario where Thursday’s record high holds and the summit wraps constructively. The maximum loss is the net premium paid, defined and capped from the moment the spread is entered.

Strategy insight – Protective puts before the weekend close. With 20-day realised vol at 10% and VIX spot at 17, index put premiums are affordable relative to the past two years. Buying a put spread on the S&P 500 or the iShares Russell 2000 ETF (IWM) before Friday’s close provides defined downside cover into a weekend where the summit outcome is unresolved and geopolitical risk has been explicitly raised. The dealer short-gamma dynamic adds a secondary case: if sentiment shifts abruptly, forced de-hedging can push moves well beyond what the fundamental news alone justifies. The maximum loss on the put spread is limited to the net premium paid; the sold put at a lower strike creates a floor below which the hedge no longer covers further declines.

Conclusion

Thursday’s session was technically clean and the all-time high above 7,500 is a meaningful level. Friday introduces two genuine unknowns: the final Beijing summit outcome and the market’s reaction to it, with the KOSPI already pricing in some disappointment at –3.94% as the European session approaches. The options market is sending a split signal – equity sentiment still call-heavy, VIX term structure steepening toward June – and defined-risk structures on both sides are priced attractively enough to act on before the weekend.

This content is marketing material and should not be regarded as investment advice. Trading financial instruments carries risks and historic performance is not a guarantee of future results. The Author is permitted to wait at least 24 hours from the time of the publication before they trade the instruments themselves. The instrument(s) referenced in this content may be issued by a partner, from whom Saxo receives promotional fees, payment or retrocessions. While Saxo may receive compensation from these partnerships, all content is created with the aim of providing clients with valuable information and options. This content will not be changed or subject to review after publication.

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