There were widespread expectations in the market that over time we would see meaningful changes to Fed communications, including around the meeting. And Kevin Warsh didn’t disappoint. We saw very, very significant changes to the range of communications at Chair Warsh's first meeting. We saw the statement completely trimmed down. And at least on the question of tone, it seemed like he very much leaned more towards the older version of Kevin Warsh when he was at the Board of Governors, where he seemed to be more focused on inflation and somewhat more hawkish signals from him. But we don’t know yet if this was just a role play to get in to the good books of FOMC members considering the baggage he comes with considering Trump’s rate cut ambitions. From a market perspective, market focus is shifting to US Fed reaction to elevated inflation than the Iran deal. The shift higher in economic forecasts and in the “dot plot” projections for the Fed funds rate this year were at the more hawkish end of expectations. While Warsh tried to downplay these somewhat in his press conference, the market has leaned into pricing hikes to materialise sooner, with USD rallying after the decision. The lack of forward guidance offered in either the Fed statement or by Warsh himself appears to be the new state of affairs and could create more room for front-end rates and FX volatility in the months ahead. Warsh had also announced the establishment of task forces focusing on five areas: Fed communication, balance sheet policy, the use of and reliance on existing data sources, productivity and jobs, and inflation frameworks. Although inflation risks are at the centre of discussion on the Committee, one of the above task forces is aimed at reviewing how the Fed should gauge inflation, suggesting that the bar to a hike might be higher until those task forces provide concrete policy proposals later this year. Summary: We still believe Fed is likely to remain on a long pause till Dec’26. But we don’t want to express this view yet via rates unless economic data starts changing. We do not see the current strength in NFPs fading at least till Aug NFP. Hence, we remain guarded on any strong rate views. But we remain bullish on DXY and expect it to go to 102 levels by July end from the current 100.85 levels. Also, if the 1yr-1yr US SOFR inches up to 4.10-4.15 levels from CMP of 4.03 levels, we like to receive half risk at these levels & another half at 4.25. Stop to this view is 4.35 and TP is 3.80.
