With risks to the dual mandate of Fed being balanced for now, Fed is likely to extend it's pause in the 29th April meeting. Our base case is they will wait until the June meeting for meaningful changes to guidance, but the risk is that communications skew more hawkish. We expect Powell will acknowledge some pushback within the committee on whether additional cuts are appropriate. Data since the March meeting have remained hawkish, with inflation likely to remain elevated and the labor market showing tentative signs of reacceleration. Labor data have been positive since the March meeting. The unemployment rate fell almost 20bp in March, from 4.44% down to 4.256%. Nonfarm payrolls rebounded sharply, rising 178k in March. On the other hand, inflation data remained elevated. We expect March core PCE inflation moderated only slightly to 0.26% m-o-m after back-to-back 0.4% readings in January and February. Our forecast translates into 3.2% YoY, which matches the Fed’s staff forecast revealed by Governor Waller in his recent speech. We also expect the Dec'26 core PCE to end at 3.1% YoY. US consumer spending also rebounded strongly in March, with strong tax refunds appearing to more-than offset the sentiment and cashflow drag from higher gasoline prices. It’s possible that many FOMC participants became more pessimistic about the inflation outlook during the blackout period in reaction to the recent evolution of the conflict in the Middle East. Even dovish officials such as Governor Waller, NY Fed President Williams & SF Fed President Daly, have emphasized patience. In totality, we expect a mildly hawkish FOMC statement with Powell's press conference likely to sound evenly balanced. In a parallel development, Justice Department has dropped its inquiry into the Federal Reserve's building-renovation cost overruns. With that threat ending, Powell can leave the central bank and make way for incoming chair Kevin Warsh. For Powell, there’s no further benefit to sticking around and courting confrontation with the president. Hence, the April meeting might be the last meeting for Powell as a FOMC member & Chair. We now expect Kevin Warsh’s senate ratification to be completed soon, and he might take over as Fed Chair by 15th May. Under his guidance, we might see the 1st rate cut coming in Q4CY26. While employment remains low hire low fire, inflation is too sticky to ignore. That does not augur well for inflation mandate of FOMC. But we believe that employment might worsen by CY26 end leading to an insurance cut. By that time, Kevin Warsh might have gained the confidence of FOMC members too to steer the FOMC in his direction. We have been recommending 2*10 US SOFR for some time now when it was in the range of 20-22. Currently it is at 25 and we expect it to go to 40 levels. We expect DXY to remain strong as US remains an oasis for growth unaffected by the current energy crisis as well as the return of the AI super cycle. We expect US equities to outperform European equities and see S&P 500 in the range of 6900-7400.
