Kevin Warsh’s firm stance on inflation has strengthened his credibility as the new chair of the US Federal Reserve, according to several major fund managers, contributing to a decline in investor expectations for long-term inflation. This shift was reflected in the drop of 10-year break-even inflation rates, which gauge the bond market’s outlook on inflation, from above 2.5 percent in mid-May to around 2.2 percent this week—the lowest level in over a year.

Market participants attributed the decline partly to the recent fall in oil prices, which have returned to levels seen before the escalation of the US-Iran conflict in late February. Additionally, Warsh’s hawkish tone at the Fed’s recent meeting played a significant role, where he described “persistently high prices” as a “burden for the American people.” This rhetoric appeared to ease investor concerns that Warsh might yield to political pressure from President Donald Trump, who has repeatedly criticized former Chair Jay Powell for maintaining what he viewed as excessively high borrowing costs.

Mike Riddell, a fund manager at Fidelity International, noted that the drop in break-even inflation was “even more than you’d expect given the oil moves,” suggesting that the Fed’s tougher stance has enhanced its credibility in fighting inflation.

The inflation challenge confronting Warsh was underscored by data showing the Personal Consumption Expenditures (PCE) Price Index rose to 4.1 percent in May, more than double the Fed’s 2 percent target. The core PCE measure, which excludes volatile food and energy prices and is the Fed’s preferred gauge of underlying inflation trends, also edged up to 3.4 percent.

Despite these elevated price pressures, market-based measures of future inflation expectations have softened. A swap contract that reflects expected average inflation over the next 12 months, beginning one year ahead, declined by 0.12 percentage points to 3.88 percent this week. Jon Hill, head of US inflation strategy at Barclays, credited this reduction to “the one-two punch of the hawkish Fed meeting and the tentative resolution to the Iran conflict,” which together lowered perceived inflation risks.

Although a deal between Washington and Tehran has helped restore oil flow through the Strait of Hormuz, traders continue to anticipate at least one quarter-point interest rate increase from the Fed by year-end, marking a notable reversal from earlier expectations of multiple rate cuts before the conflict.

Views differ on the implications of Warsh’s approach for future monetary policy. Krishna Guha, vice-chair at Evercore ISI, suggested that if inflation eases by September, Warsh might maintain his hawkish rhetoric without needing to raise rates. However, if inflation remains elevated, Guha said Warsh could face pressure to increase rates to preserve his credibility.

Some investors and economists caution that Warsh’s tough talk may be partly strategic, aimed at anchoring inflation expectations without necessarily triggering immediate rate hikes. Aaron Rock, head of rates at Aberdeen asset management, observed that only time will reveal whether Warsh’s hawkish tone is a prelude to tightening or a means to avoid it.

Overall, Warsh’s assertive messaging has so far reinforced market confidence in the Fed’s commitment to controlling inflation, even as economic data continue to test that resolve.