Rabobank\u2019s Philip Marey said Kevin Warsh\u2019s nomination as Federal Reserve Chair points to lower US policy rates in 2026. The expectation given was three cuts of 25 basis points each in 2026.<\/p>\n
This path would take the federal funds rate slightly below the median Federal Open Market Committee estimate of the neutral rate. Marey also said Warsh may seek to persuade other FOMC members to reduce their neutral-rate forecast using an argument linked to artificial intelligence.<\/p>\n
The note said Warsh supports shrinking the Fed\u2019s balance sheet and may aim to move the operating framework from ample reserves to scarce reserves. It also described a risk that longer-term yields could rise even if policy rates fall.<\/p>\n
The article linked this potential rise in longer-term rates to housing conditions, referring to a \u201chousing recession\u201d. It added that the piece was produced with help from an artificial intelligence tool and reviewed by an editor.<\/p>\n
With the new Fed Chair signaling a dovish tilt, we are positioning for lower short-term interest rates. The market is increasingly pricing in the three 25 basis point cuts expected for 2026, a move supported by January’s Core PCE inflation data, which eased to 2.8%. Traders should therefore consider positioning in SOFR futures to capitalize on the anticipated decline in the policy rate.<\/p>\n
The simultaneous plan to shrink the Fed\u2019s balance sheet, however, introduces a major conflict that will likely push longer-term yields higher. This sets up a clear opportunity for yield curve steepener trades, going long the 10-year Treasury yield and short the 2-year. We saw the groundwork for this trade being laid throughout the second half of 2025 as the market began to digest this policy divergence.<\/p>\n
This tension between rate cuts and quantitative tightening is a recipe for higher market volatility. The bond market’s MOVE index has already ticked up to 115, a noticeable rise from the calmer levels seen late last year. We believe buying options that benefit from wider price swings, particularly in Treasury ETFs, is a prudent way to position for the coming weeks.<\/p>\n
The explicit goal of this strategy is to relieve the housing recession that persisted through 2025. January\u2019s report showing existing home sales at a sluggish 3.95 million annual rate highlights the urgency. We are closely watching mortgage-backed securities, as their performance will signal whether rate cuts can successfully offset the upward pressure on mortgage rates from a shrinking Fed balance sheet.<\/p>\n
Create your live VT Markets account<\/a>\u00a0and\u00a0start trading<\/a>\u00a0now. <\/b><\/p>\n","protected":false},"excerpt":{"rendered":" Warsh Fed chair nomination signals three 2026 rate cuts, balance-sheet reduction, and possible rise in long-term yields.<\/p>\n","protected":false},"author":62,"featured_media":17021,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[59],"tags":[],"class_list":["post-41861","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-live-updates"],"acf":{"acf_article_selection_author":null},"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/posts\/41861","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/users\/62"}],"replies":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/comments?post=41861"}],"version-history":[{"count":0,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/posts\/41861\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/media\/17021"}],"wp:attachment":[{"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/media?parent=41861"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/categories?post=41861"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.vtmarkets.com\/en-ca\/wp-json\/wp\/v2\/tags?post=41861"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}