Societe Generale’s Kenneth Broux frames Kevin Warsh’s confirmation hearing as pivotal for US rates, with markets focused on potential changes to the Fed’s reaction function and implications for the long end of Treasury yields. He notes concerns that past policy choices have increased vulnerability to shocks and may be pushing investors to demand higher term premia.

Fed transition watched for curve signals

“Central Banks at a Crossroads” is the title of the speech delivered by Kevin Warsh almost one year ago to this day in the margins of the IMF Spring meetings (G30, April 25, 2025). “Reforming, if not restoring, key economic institutions” dives straight into the debate about the role of government agencies incl the central bank, how to be accountable and responsible for policy actions.”

“The bond market will try to glean valuable insights during today’s confirmation hearing. How does the Warsh Fed evolve from the Powell Fed, are there reasons to position for tweaks in the yield curve in either bear flattening or steepening fashion. The administration is hell bent on lowering interest rates before the midterms but that’s a long shot.”

“Warsh will from June (most likely) navigate a tricky landscape and a bulging in-tray at a time when inflation could be re-accelerating (energy prices, World Cup) and reckless stewardship of government finances is motivating investors to bid up the term premium or compensation to hold Treasury debt.”

“Money markets rate the probability of one cut this year at 50%. Some of the personal views that emerged from his speech last year is that preferred measure of inflation is beneath the high standing of the central bank. Data dependence could be discontinued and near-term forecasting is another distraction.”

“The bottom line is that policy choices of the past have made the US economy more vulnerable to shocks and less able to adjust organically. With every new crisis, the bazooka must get bigger. Under pressure from Trump, Markets assume that the Fed could be more inclined to navigate a path of lower rates. This was Warsh last year: “I strongly believe in the operational independence of monetary policy as a wise political economy decision. And I believe that Fed independence is chiefly up to the Fed”.”

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