Fed Chairman Kevin Warsh is a relative stranger to the bond market, says BofA’s Mark Cabana

Summary

Mark Cabana, BofA head of U.S. rates strategy, discussed the Fed's policy meeting under new Chairman Kevin Warsh, whom he calls a relative stranger to the bond market. He expects no rate change but sees potential for volatility and hawkish dot plot projections. He noted oil's price drop could ease inflation pressure but the resilient labor market and AI investment boom complicate the outlook. He views rates as not clearly restrictive and highlighted a divide between interest rate-sensitive housing and rate-insensitive AI spending.

• Kevin Warsh is a relative stranger as Fed Chair, creating policy uncertainty and potential for bond market volatility.
• Fed expected to hold rates steady, but some officials likely to pencil in rate hikes in the dot plot.
• Oil prices have fallen sharply (WTI near $76), which may reduce pressure for near-term rate hikes.
• US consumer and labor market remain resilient despite commodity shocks.
• Financial conditions do not suggest interest rates are restrictive, making the case for hikes unclear.
• Housing market has been stagnant and is rate-sensitive, but AI investments are largely rate-insensitive.
• Mortgage rates likely to remain around 6.5% with no large upward move even if the Fed hikes moderately.