FOMC Setup: How Powell's Last Meeting Reshapes the Real Rate Path
Capital Flows
· Capital Flows
· April 29, 2026 at 01:57
· ⏱ 7 min read
| Read on Substack ↗
Summary
The article argues that the FOMC hold into rising inflation swaps is mechanically compressing real rates and fueling a risk-on melt-up, while the upcoming Powell-to-Warsh handoff marks a regime change that will decouple interest rate policy from balance sheet policy. For markets, this means the current liquidity-driven equity bid remains intact until inflation expectations roll over or the Fed shifts its stance, with the long end of the curve and currency the key indicators of any policy error.
•Market prices 100% probability of a hold and a pause across the year, with Z6 SOFR at the midpoint of its range — no cuts or hikes expected.
•One- and two-year inflation swaps have risen while the Fed has not responded, causing real rates to fall and mechanically pushing capital out the risk curve.
•The 2018 case study shows a hawkish error (Fed hiking into falling inflation swaps) led to a 25% equity drawdown; the current setup is the opposite and does not apply.
•Warsh's framework will split interest rate and balance sheet policy for the first time in the modern Fed era — cutting rates while contracting the balance sheet to offset asset price inflation.
•Bill-heavy versus bond-heavy Treasury issuance is an underpriced liquidity lever; Warsh and Bessent can shift the duration mix to move equities without any rate change.
•The IGV vs SMH divergence (long software, short hardware) reflects long-short fund positioning that could face mechanical unwinding from FOMC or PCE volatility.