Warsh Fed appointment unlikely to deliver rate cuts, analysts warn

What the desk is arguing

The desk argues that the appointment of Kevin Warsh as Fed chair is unlikely to result in the rate cuts that markets had hoped for, primarily due to persistent inflation and a hawkish stance from the FOMC. Analysts note that inflation remains well above the Fed's 2% target, which complicates any move towards easing monetary policy. Per the full note source, this backdrop has led markets to shift their expectations towards a potential rate hike rather than a cut.

Supporting this view, analysts emphasize that Warsh's influence on the FOMC is limited as he holds only one of twelve votes. Any push for rate reductions would require consensus from a committee that is increasingly hawkish, making unilateral action unlikely. Moreover, the potential for a bear steepening of the yield curve poses risks, particularly for long-duration bonds, should the Fed attempt to ease policy prematurely.

Where it sits in our coverage

Our consensus target for the USD is 1.075, with a range of 1.04 to 1.12. Notable firm targets include: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26) - citi: 1.12 (Mar26)

This view aligns with jpmorgan and citi, who also anticipate a cautious approach from the Fed. However, it diverges from bofa, which holds a more bearish outlook on the USD, sitting at the lower bound of the consensus range.

How other firms see it

Firms like jpmorgan and citi are aligned in their expectation that the Warsh-led Fed will maintain a hawkish stance, focusing on inflation control rather than rate cuts. Conversely, bofa presents a contrary view, suggesting that the Fed may need to pivot sooner than expected due to economic pressures.

Traders should monitor the USD/JPY trajectory as it may reflect the Fed's policy shifts, particularly in light of the current inflationary environment and the potential for changes in risk sentiment across markets.