THINK Ahead: Why Kevin Warsh is wrong about inflation
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.
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.
How firms align with this view
Aligned with the desk view
Contrary positioning
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.
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.
Risks to this view
A reversal in this call could be triggered by unexpected inflation upticks or aggressive monetary policy changes vis-a-vis the Fed's next meeting. Heightened geopolitical tensions impacting energy prices could also exacerbate inflation fears, leading to a hawkish pivot from the Fed.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
MUFG | Bullish | 1.1800 |
J.P. Morgan | Bearish | 1.1300 |
UBS | Bullish | 1.1800 |
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 be coming, but the case is far from compelling.
Read on for our guide to the week ahead Fed Chair Kevin Warsh has made it clear that he sees inflation as an ongoing challenge Why Kevin Warsh is wrong about inflation There can now be little doubt about Kevin Warsh's views on US inflation. Every syllable of his Jackson Hole speech last week was hawkish. The core message was that he’s a big-picture guy.
And the big picture on inflation, he argued, simply isn’t getting any better. But is that really true? Take this chart, the centrepiece of Warsh’s speech: More than 50% of price categories have inflation rates above 3% Our numbers don't exactly match the ones cited by Chair Warsh, but are within a couple of percentage-points.
Source: Macrobond, ING "> Our numbers don't exactly match the ones cited by Chair Warsh, but are within a couple of percentage-points. Source: Macrobond, ING This shows the distribution of inflation rates across roughly 200 categories within the Fed's preferred inflation gauge, the core PCE deflator. More than half of those categories are currently experiencing inflation above 3%.
A quarter are running above 5%. That sounds alarming. Yet I have some problems with all of this.
My main bugbear is that it purposefully avoids weights. Doctors' services, which account for roughly 4% of the inflation basket, are treated with exactly the same importance as intercity buses, which account for around 0.006%. A lot simply depends on how granular the statisticians have decided to report different pricing categories.
What’s more, when you break it all down, you find that goods prices account for virtually all of the worrying shift in the distribution of price increases. Many of these goods have small weights in the overall basket. And more importantly, it suggests tariffs are the main culprit behind Warsh’s scary chart.
Tariffs explain a lot of Warsh's scary chart Source: Macrobond, ING "> Source: Macrobond, ING But the impact of tariffs is changing rapidly. Following the Supreme Court's ruling against large parts of President Trump's emergency tariff programme earlier this year, tariff refunds now exceed tariff revenues collected by the US Treasury. In July alone, refunds amounted to roughly 10% of the value of total US imports.
Sources & References
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