The Fed’s Course Under a New Chair

Summary

Matthew Hornbach and Michael Gapen discuss the January 2026 FOMC meeting and the nomination of Kevin Warsh as the next Fed chair. They view the FOMC hold as dovish, with the Fed retaining an easing bias and rates expected to move lower over time. They also assess how Warsh might affect the Fed's reaction function, balance sheet, and communication strategy, with market implications including possible Treasury curve steepening and higher risk premiums.

• January 2026 FOMC meeting was widely expected to be a hold.
• Michael Gapen characterizes the meeting as a dovish hold with an easing bias.
• The Fed is seen as likely to cut rates later if inflation decelerates and labor data hold up.
• Kevin Warsh's nomination is not expected to materially change the Fed reaction function near term.
• Warsh's preference for less Fed communication could raise market volatility and term premium.
• A Warsh-led Fed might push for a smaller balance sheet, but changes would take time.
• Market reaction to Warsh's nomination was most visible in prediction markets.
• Matthew Hornbach sees a risk of a steeper US Treasury curve if communication policy changes.