How Long Can the Fed Hold On?

Summary

Andrew Sheets discusses the new Fed Chair Kevin Warsh's dual emphasis on lowering inflation and reducing communication. The market reaction reduced rate hike expectations, steepened the yield curve, weakened the dollar, and lifted inflation expectations. Morgan Stanley expects inflation to moderate, which could justify the Fed's approach, but if not, pressure will mount. Rate strategists forecast continued yield curve steepening.

• New Fed Chair Warsh aims to lower inflation and limit market guidance.
• The market interpreted the lack of action as a higher bar for rate hikes.
• Post-meeting reaction: lower rate hike odds, steeper curve, weaker USD, higher breakevens.
• Morgan Stanley economists expect inflation to moderate in H2 2025.
• If inflation stays high, the Fed will need to act with a clear framework.
• Rate strategists believe yield curves will continue to steepen.
• Fed credibility is being tested amid sticky inflation and reduced communication.