Rates Spark: Warsh’s Fed takes inflation seriously
At a Glance
The desk underscores a bullish sentiment towards the sensitivity of the Federal Reserve towards inflation, as indicated by an uptick in the 10-year Treasury yield to around 4.45%. This rise stems from an increase in real yields, juxtaposed against a decline in breakeven inflation, reflecting a cautious but proactive stance by the Fed under Warsh's leadership. Per the full note from the bank research, this markedly shifts market expectations regarding future rate hikes. Consensus now hints at a potentially flatter yield curve, with the Fed signaling its readiness to combat inflation, even if rate hikes aren’t definitively on the horizon.
Key Takeaways
- 01Warsh's Fed emphasizes a serious approach to inflation, impacting market rates.
- 02The yield curve has adjusted following the Fed's recent statements, suggesting long-dated yields may remain elevated.
- 03Current market positions indicate a cautious optimism, leaning towards a flatter curve as inflation fears persist.
- 04Expectations continue to pivot, anticipating Fed action, even if not immediately necessary.
Full Analysis
What the desk is arguing
The desk posits that the Fed's newfound focus on inflation, particularly under Warsh's stewardship, instills credibility in potential policy shifts, which could influence the yield curve significantly. Per the full note , the recent shift in the Treasury curve, with long-dated yields remaining sticky to the upside, illustrates the market's reaction to this new Fed posture.
This sentiment is reinforced by the observed dynamics in the real versus breakeven yields, where a larger increase in real yields has occurred despite falling breakeven inflation rates. This balancing act indicates that while inflation is on the Fed’s radar, the approach may be one of caution rather than commitment to immediate rate hikes.
Where it sits in our coverage
For EUR/USD, our current consensus target is 1.1567, with an average forecast of 1.1700 by March 2026, supported by firms like deutschebank at 1.1800 and mufg at 1.1800. Notably, this positions our view near the lower end of the broader spread among analyst targets, reflecting a more cautious outlook in relation to anticipated Fed actions in the coming months.
How other firms see it
Across the board, aligned firms such as hsbc and bofa maintain a contrarian stance, each anticipating a steadier or even weakened path for the dollar relative to the euro and pound in the face of Fed signaling. Conversely, contrary institutions like mufg see potential strength for GBP/USD, positioning themselves at the upper end of forecasts.
The scrutiny of the ECB’s decisions surrounding potential rate changes coincides with this narrative, as the EUR/USD trajectory is likely to mirror not just Fed leadership, but also European economic indicators heavily influenced by the BoE’s choices.
Market Implications
Watch for any assessments from the Fed influencing yields or driving USD pairs, particularly near the 4.45% mark for 10-year yields, which may act as a pivotal support/resistance level. The next BoE statements could also create volatility in GBP pairs that are intertwined with Fed expectations.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Rabobank | Bearish | 1.1000 |
ING | Bullish | 1.1300 |
MUFG | Neutral | 1.1200 |
From the original
Articles Rates Spark: Warsh’s Fed takes inflation seriously 21:24 Rates Spark Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download The 10yr yield is up, back to the 4.45% area. The rise in the 10yr yield came from a bigger pop in the real yield versus the
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