Market participants will be keeping an eye on the Fed’s views at the upcoming FOMC meeting. Investors have gravitated towards a more moderate outlook for Fed policy, factoring in less than a cut by the end of 2027. We think this is reasonable as recent US data seem to be skewing closer to overheating (decent labour market data and inflation prints higher than 3% YoY) than stagflation (which would result in a policy conflict). Against this backdrop, there is no room for aggressive easing. It is also premature to consider tightening (the market panicked in late March) with many central banks opting for a wait-and-see approach for now. in the fog of war, data becomes the only reasonable guide.
We think it makes sense to brace for a higher-for-longer rates world, amidst what looks to be higher-for-longer inflation. We think this holds true even as the path for Warsh to get nominated (voting is scheduled on 29th April now that Senator Tillis has dropped his blockade) gets cleared. Fed independence is still the base case, and it would be difficult for Warsh to convince Fed members to ease quickly if data is not supportive. Moreover, his preferences for less forward guidance and a reduction in Fed balance sheet should point to higher term premium, steepening the UST curve in the process. It remains to be seen if Warsh’s view that AI will drive productivity (and thus a strong disinflationary force and lower rates) would eventually play out. We suspect that that there would be some scepticism on this in the near term. Lastly, watch for Fed Chair Powell’s cues on whether he would continue to stay as governor when Warsh gets nominated as Fed Chair. 
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