A Fed led by Warsh may place greater emphasis on QT and inflation risk, while the U.S.-Iran memorandum has eased oil prices but uncertainty remains high

Overview

This report is Nomura's macro policy research, in which author Richard Koo analyzes the policy orientation after Kevin Warsh takes over as Fed chair and the Middle East situation following the U.S.-Iran memorandum. The report argues that Warsh's core monetary-policy stance is close to conservative mainstream monetarism: QE should only be used as an emergency tool during a liquidity crisis, and it should be exited quickly once the crisis passes; if the liquidity released by QE is maintained for a long time, it may turn into inflationary pressure once the private sector resumes borrowing. At the same time, the rise in energy prices caused by the U.S. war with Iran has again exposed the Fed to the risk that external shocks spread into domestic inflation.

Core views

The report's core views include: first, if crude oil prices do not fall sharply because of the U.S.-Iran memorandum, the Fed may have to adopt a hawkish stance to avoid repeating the experience of out-of-control inflation after the 2022 supply-chain shock. Second, Warsh opposes normalizing QE, but the author also points out that in a balance sheet recession, simply increasing the monetary base cannot reach the real economy, so it is not surprising that QE in the 2010s failed to lift inflation. Third, private-sector borrowing in the U.S., Europe, and Japan has now recovered, so the monetarist framework has regained stronger explanatory power; therefore, Warsh's push for QT to control inflation risk has a certain rationale. Fourth, QT suppresses inflation by pushing up long-term rates, which may steepen the U.S. yield curve; this is the opposite of Japan's policy direction of raising short-end rates and stabilizing long-end rates to flatten the curve, and its impact on USD/JPY should be watched. Fifth, the U.S.-Iran memorandum reduced concerns about a Strait of Hormuz blockade and lowered oil-price expectations, but the final agreement still carries significant uncertainty.

Analysis framework

The report combines historical comparison with policy-mechanism analysis: on the one hand, it compares the two oil shocks in the 1970s, QE after the 2008 Lehman Crisis, the balance sheet recession in the 2010s, and QE during the 2020 pandemic; on the other hand, it compares the initial conditions of U.S.-Iran negotiations in the Obama era in 2015 and under Trump in 2026. By distinguishing lender-side problems, borrower-side problems, and the state of private-sector balance sheets, the author explains why QE works during financial crises, struggles to stimulate inflation during a balance sheet recession, and may again create inflation risks once credit recovers.

Methodology notes

• Macro monetary policyMonetarism

  Monetary base and inflation risk

  Warsh's views are close to Milton Friedman's traditional monetarism, which holds that excessive central-bank money creation will eventually push up inflation, so QE should be limited to crisis periods and cannot become a routine policy tool.

• Macro cycle analysisBalance sheet recession

  Private-sector deleveraging makes monetary policy ineffective

  The author argues that when the private sector prioritizes debt repayment and stops borrowing because an asset bubble has burst, even if interest rates are near zero and the central bank injects liquidity on a large scale, the funds still cannot easily enter the real economy, so neither inflation nor growth will rebound materially.

• Central bank toolkitQE and QT mechanism

  Separation of quantity tools and price tools

  QE increases bank reserves, while QT absorbs liquidity by selling or shrinking holdings of Treasuries and MBS, and may suppress the economy and inflation by pushing up long-term rates.

• Geopolitical comparisonComparison of initial conditions for U.S.-Iran negotiations

  Differences between the 2015 and 2026 negotiation environments

  The report compares U.S. allies, the IAEA, China and Russia, Iranian moderates, U.S. credibility, and Israel-related factors, concluding that the starting point for U.S.-Iran negotiations in 2026 is clearly weaker than in 2015.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• U.S. Treasuries and MBS

  Assets directly affected by QT

  Strengths

  Balance-sheet reduction helps withdraw excess liquidity and suppress inflation expectations.

  Weaknesses

  Selling or reducing holdings may push up long-term yields and depress bond prices.

  Comparison

  Unlike the Volcker era's tightening through short-end rates and reserve constraints, Warsh's path relies more on long-end rate transmission.

  Risks

  An overly rapid QT could trigger significant volatility in the bond market.

• U.S. real estate and housing market

  Significantly affected by long-term rates

  Strengths

  If inflation falls and policy rates decline, financing conditions may improve.

  Weaknesses

  QT may push up mortgage-related long-term rates and offset the benefits of rate cuts.

  Comparison

  The report notes that Trump comes from the real estate industry, but real estate depends more on long-term rates than on short-term policy rates.

  Risks

  If long-term rates fail to fall or rise further, housing demand and valuations may come under pressure.

• Crude oil

  A key variable in U.S.-Iran relations and the inflation path

  Strengths

  After the memorandum was signed, concerns about a Strait of Hormuz blockade eased, creating room for oil prices to fall.

  Weaknesses

  The final agreement is still uncertain, and the geopolitical risk premium is difficult to eliminate completely.

  Comparison

  The report likens the current energy shock to the oil shocks of the 1970s and the supply-chain shock of 2022.

  Risks

  If negotiations break down or conflict escalates, higher oil prices may once again lift U.S. inflation pressure.

• USD/JPY

  Affected by differences in U.S.-Japan yield curves

  Strengths

  If U.S. long-term rates remain elevated because of QT, the dollar may receive support from the interest-rate differential.

  Weaknesses

  Bank of Japan rate hikes and policy adjustments may alter expectations for Japanese rates.

  Comparison

  The U.S. may steepen the curve by lowering short-end rates and keeping long-end rates high; Japan may flatten the curve by raising short-end rates and slowing the reduction in JGB purchases.

  Risks

  Differences in curve policy and changes in the inflation path may create exchange-rate volatility.

• Banking system and credit

  The transmission channel for judging whether leftover QE liquidity turns into inflation

  Strengths

  The recovery in credit shows that real-economy demand is stronger than in the 2010s.

  Weaknesses

  If credit expands too quickly, external shocks may be amplified by domestic factors.

  Comparison

  In the 2010s, U.S. bank loan growth was only about 3.1% annualized, whereas in May 2026 it had reached 7.6% y/y.

  Risks

  Once private-sector borrowing recovers, an excess-reserve environment may amplify inflation and asset-price volatility.

Key data

• Warsh took office2026-05-22The report says Kevin Warsh became Fed chair on May 22.
• First FOMC meeting under Warsh2026-06-16 to 2026-06-17, policy rate left unchangedThe post-meeting press conference emphasized the creation of five task forces for a fundamental review of the Fed.
• U.S. bank loan growth after the pandemic7.6% y/y in May 2026The report argues this shows that private-sector credit demand in the U.S. is different from the 2010s.
• Bank loan growth in the eurozone and JapanEurozone 3.4% y/y in April 2026; Japan 5.4% y/y in April 2026Both are higher than the low-credit-growth environment in the ten years after the Lehman Crisis.
• Change in monetary base before and after the Lehman CrisisThe current U.S. monetary base is 6.13 times the pre-Lehman Crisis levelThe report uses this data to explain Warsh's concern about the long-term inflation risk posed by leftover QE liquidity.
• Excess reserve multiples1450x in the U.S., 2219x in Europe, and 1701x in JapanRelative to the pre-Lehman level, this shows that reserve supply is no longer constraining private-bank lending.
• Federal funds rate during the Volcker eraPeaked at about 22%The report uses the 1979 Volcker tightening as a contrast to Warsh's preferred tightening path through long-term rates.
• U.S.-Iran memorandum signing date2026-06-17After the signing, the market expected risks of a Strait of Hormuz blockade to ease and crude oil prices to retreat.

Impact & implications

For markets, the report suggests that investors should not focus only on whether the Fed cuts short-term policy rates, but should also watch QT's impact on long-term rates and the yield curve. If Warsh pushes QT while also creating room for rate cuts, the U.S. yield curve may steepen, and the real estate and housing markets may come under pressure; meanwhile, Japan's policy direction leans toward flattening the curve, so differences in U.S.-Japan yield curves may affect USD/JPY. In commodities, the U.S.-Iran memorandum has temporarily eased oil-price pressure, but if negotiations stall or geopolitical risks rise again, energy prices could once again lift inflation expectations.

Risks

• If oil prices do not fall significantly, U.S. inflation pressure may persist and force the Fed to stay tight.
• An overly rapid QT could lead to a bond-market selloff or a sudden tightening of financial conditions.
• The coexistence of short-end rate cuts and rising long-term rates may weaken the real estate and housing market.
• It remains uncertain whether the U.S.-Iran memorandum can turn into a final agreement; Iranian hardliners, declining U.S. credibility, and Israel-related factors are all obstacles.
• If the market focuses only on rate cuts and ignores QT, it may underestimate the risk of yield-curve steepening.

What to watch

• Whether subsequent U.S.-Iran negotiations produce a final agreement and whether risks related to the Strait of Hormuz continue to decline.
• Whether crude oil prices fall sharply or instead become an upward driver of U.S. inflation again.
• The conclusions of the five task forces under Warsh's Fed review and whether they change the QE/QT framework.
• The pace of QT, the path of Treasuries and MBS runoff, and the reaction of long-term U.S. Treasury yields.
• Whether U.S. bank loan growth, employment, and inflation data confirm that domestic demand remains strong.
• Differences in U.S.-Japan yield curve direction and their impact on USD/JPY.