Rabobank’s Philip Marey argues that Kevin Warsh’s nomination as Fed Chair points to lower US policy rates in 2026, with three 25 bps cuts expected, slightly below the current neutral rate estimate. Marey highlights Warsh’s shift from inflation hawk to dove, his AI-driven neutral-rate argument, and his push to shrink the Fed’s balance sheet and potentially move from ample to scarce reserves.

Warsh tilt to cuts and QT risks

"So while definitely not the most dovish choice that Trump could have made – in fact Warsh was probably the least dovish on the final shortlist of four candidates –, we still think that the new Fed Chair is going to deliver rate cuts."

"We have three cuts of 25 bps each pencilled in for 2026, which would bring the federal funds rate slightly below what the median FOMC participant considers to be the neutral rate."

"In fact, Warsh may also try to convince other FOMC participants to lower their forecast of the neutral rate, based on the AI argument."

"Warsh’s argument is that this is exactly what will force the FOMC to cut policy rates, because this could offset the upward effect at the longer end of the curve."

"On balance, the longer end of the curve could even rise, which would not help solve the “housing recession” that Warsh wants to end through policy rate cuts."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)