What to do if the Fed falls behind the curve (making a monetary policy error)
If Warsh decides to keep interest rates unchanged, which is likely: current rates are not accommodative, the labor market is performing well, and inflation is visible in non-cyclical components (healthcare, portfolio management fees, energy shocks).
Consequences:
=> The VIX floor will rise alongside a decrease in dispersion (transfer from idiosyncratic to systemic risk).
=> The inflation risk premium will increase (TIPS = securities with inflation break-evens).
=> Higher volatility in long-term rates (TLT puts).
=> Rising SPX/TLT correlation (TLT puts / SPX puts).