THINK Ahead: Why Kevin Warsh is wrong about inflation
At a Glance
The desk believes the recent hawkish stance by Fed Chair Warsh on inflation may not fully reflect the underlying data trends. Per the full note , while Warsh highlights alarming data indicating over 50% of price categories have inflation rates above 3%, the desk argues that this view neglects the weighted impacts of different price categories. Additionally, the potential for a rate hike remains contentious, as the compelling case for tightening monetary policy appears weaker amidst mixed signals from the broader economic indicators.
Key Takeaways
- 01The desk contests Warsh's hawkish inflation viewpoint, citing necessary considerations of data-weighting.
- 02Concerns about inflation persist, but emerging evidence may complicate the Fed's justification for rate hikes.
- 03Current consensus target for EUR/USD is 1.1700, reflecting a predominantly bullish outlook across major firms.
- 04Key interactions are noted with USD/JPY and GBP/USD as markets assess implications of Fed policy.
Full Analysis
What the desk is arguing
The desk contends that Fed Chair Kevin Warsh’s hawkish interpretation of inflation data overshadows key nuances in the current environment. Per the full note , Warsh’s argument centers on the troubling statistic that over 50% of price categories exceed a 3% inflation rate; however, this interpretation may inflate concerns without considering the varying significance of those categories.
Moreover, the desk points to the need for a more nuanced understanding of price dynamics, emphasizing that goods prices are primarily responsible for significant shifts in inflation distribution. For instance, the focus should broaden beyond headline figures to encompass underlying economic factors, which may suggest a moderation in inflation pressures that does not warrant immediate rate hikes.
Where it sits in our coverage
Our current consensus target for EUR/USD stands at 1.1700, with a range from 1.1200 to 1.2000, and several firms share this outlook. Notably, firms such as ING with a Mar-26 target of 1.1700 as well as RBC with their Dec-26 target of 1.2000 suggest a collaborative view on Euro strength against USD.
This perspective aligns with the broader consensus, reflecting an absence of significant divergence from the forecasts shared across firms. In particular, our projection aligns closely with those of Morgan Stanley and Stanchart, both echoing bullish sentiments as reflected in their targets, thereby situating our view towards the higher end of the projected range.
How other firms see it
Many firms appear aligned on their bullish outlook for the Euro, with ING, RBC, and HSBC collectively indicating a consensus that supports upward movement. Meanwhile, contrary projections come from Lloyds and Nomura, who maintain more conservative positions, highlighting their bearish stances in this market landscape.
This discourse is further intertwined with the evolving narratives around GBP/USD and USD/JPY, as both currency pairs are closely linked to Federal Reserve policy shifts and inflation trajectories. Observing USD/JPY may shed additional light on how the Fed's next moves might affect broader currency dynamics.
Market Implications
Watch for the EUR/USD to test resistance levels around 1.1700, amidst the backdrop of upcoming economic data releases which could shape Fed expectations. Positioning in USD/JPY could also be pivotal as inflation data continues to evolve.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
MUFG | Bullish | 1.1800 |
Danske Bank | Bearish | 1.1100 |
UBS | Bullish | 1.1800 |
From the original
Opinions Opinion by James Smith THINK Ahead: Why Kevin Warsh is wrong about inflation Published 14:20 The Fed Chair made it clear at Jackson Hole that underlying inflation is not improving. But this is simply not what the data is telling us, writes James Smith . A rate hike may b
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4 itemsWarsh guides forward without forward guidance
Lead — The desk sees a net hawkish tilt emerging from Chair Warsh's latest commentary at the Jackson Hole Symposium, signaling potential shifts in monetary policy without explicit forward guidance. Per the full note, Warsh emphasized the Fed's commitment to controlling inflation, asserting a belief that current inflation expectations might not be well-anchored, which has impacted both front and back-end rates. The current consensus for EUR/USD sits at 1.1700 for Mar26, aligning with this hawkish sentiment amidst a mixed outlook from various firms. In this context, traders should monitor the evolving interest rate landscape closely.
Rates Spark: Hike temptation
Per the full note [source], ING's rates desk argues the Fed under Chair Kevin Warsh is tempted to hike despite market pricing for no change, citing inflation risks and credibility concerns. The commentary pegs the odds at 60:40 for a hold, but warns that a 25bp hike now would validate Warsh's price stability focus. With no tracked currency pair in our internal coverage, the note focuses on the Fed's dilemma rather than specific FX impacts.