Warsh 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.
What the desk is arguing
The desk posits that Chair Warsh's address indicates a shift towards a more aggressive monetary stance, despite the lack of explicit forward guidance. His comments on the need for stable prices while acknowledging that inflation remains well above the 2% target suggest a readiness to act if necessary. This was evidenced by the flattening of the yield curve, with front-end yields rising as traders price in potential tightening.
Warsh's observations regarding buoyant capital expenditure driven by AI and a resilient labor market underscore that monetary conditions are not yet significantly restrictive. This backdrop has led to some recalibrations in rate expectations, with market participants interpreting his speech as a signal of future tightening measures.
Where it sits in our coverage
For EUR/USD, our consensus target is currently set at 1.1700, with a range spanning from 1.1200 to 1.2000 by Mar26. Notable firm targets for Dec26 include ING at 1.1700, Morgan Stanley at 1.2000, and RBC at 1.2000.
This view aligns with the upper end of the cross-firm consensus, notably higher than the lower projections from firms such as Lloyds, which targets 1.1331 for the same timeframe.
How other firms see it
Among the aligned firms, ING, RBC, and Morgan Stanley share a similarly hawkish outlook. In contrast, Nomura and DANSKE present more cautious projections regarding GBP/USD and a slower pace of rate increases due to economic headwinds.
Additionally, movements in the USD/JPY could act as a critical bellwether, reflecting broader market sentiment towards U.S. monetary policy shifts as they intertwine with valuations in other asset classes.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Chair Warsh's comments indicate a more hawkish stance from the Fed, despite no formal forward guidance.
- 02Market rates are adjusting, with the yield curve becoming flatter in response to anticipated Fed actions.
- 03Current consensus for EUR/USD sits at 1.1700 for Mar26, suggesting a broadly hawkish sentiment amid mixed projections.
- 04Traders should remain vigilant for shifts in inflation expectations as they could catalyze further market movements.
Market implications
Watch the EUR/USD as it approaches the consensus target of 1.1700; any further hawkish signals could push rates even higher. Additionally, the reaction in USD/JPY may indicate broader market sentiment regarding U.S. monetary policy.
Risks to this view
A shift towards a more dovish stance from the Fed or unexpected negative economic data could quickly reverse the current hawkish narrative. Any signs that inflation is indeed mean-reverting could also dampen aggressive rate hike expectations.
EUR/USD — All Desk Targets
| Firm | Stance | YE 2026 |
|---|---|---|
Morgan Stanley | Bullish | 1.2150 |
UOB | Bullish | 1.1800 |
ING | Bullish | 1.1700 |
Older quick take Quick take Published 15:46 Rates United States Warsh guides forward without forward guidance We got far more here from Chair Warsh then we were getting from his two FOMC meetings to date. He was keen not to provide forward guidance, but his words smacked of forward guidance; he was net hawkish. That does not guarantee anything, but front end rates are higher and back end rates lower as a reaction.
Seems fair. Nothing on the Treasury buybacks, as expected Fed Chair Warsh struck a hawkish tone at the Jackson Hole Symposium and the yield curve has come out flatter on both ends Share X LinkedIn E-mail Copy link Share X LinkedIn E-mail Copy link Download Padhraic Garvey, CFA Regional Head of Research, Americas Warsh's hawkish words pivots the curve flatter At the Jackson Hole Symposium, Chair Warsh struck a more hawkish tone than the bland price stability ambition that he had opined on from FOMC meetings. Key Comment: Price stability is not self-executing, nor is inflation necessarily mean-reverting.
It is the Fed’s job to deliver stable prices. That, with the acknowledgement that inflation is well above 2%, struck a clear tone of hawkishness from the Chair. To boot, Warsh noted that the inflation trend has not meaningfully improved, while the Fed's 2% PCE inflation objective is firm.
He also made reference to strong capex growth related to AI, noted low credit spreads and strong issuance, and that commercial and loans markets were buoyant; emphasising that monetary conditions are not restrictive. He also noted a stable labour market and low jobless claims. Chair Warsh concluded by noting that market expectations are relaxed on inflation, and asserted a belief that such expectations can be achieved, with the Fed's job to ensure that inflation does not become un-anchored.
He was more balanced here, but net hawkish overall. The yield curve has come out of this flatter from both ends. The front end has been hurt (2yr yield), while the back end has been comforted (30yr yield a tad down).
The 10yr yield is mixed, but the inflation breakeven a tad lower. The 5yr part of the curve is de-richening (cheapening) also, which points to an increased worry on the rate hike risk. The 2yr yield is up to 4.3%, pushing the carry spread to the funds rate out to above 66bp.
Typically, when that gets to 75bp there is an imminent hike priced. The September FOMC meeting has been re-priced as a toss of a coin. Before the speech, it was priced at a 34% probability for a hike.
It's now at 54%. He also made some humbling remarks on the ability of the Fed to forecast the future, and noted that the markets watching the Fed for forward guidance, and the Fed in turn watching market reflective expectations, is not an optimal outcome. Hence, the rationale for less forward guidance.
Sources & References
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