Five charts to track the Warsh sentiment shift

Friday's crash in gold and silver made many think Warsh is hawkish - he won't be

Friday’s price action was overshadowed by the massive drop in precious metals, which caused many to interpret market reaction to Kevin Warsh as hawkish. That isn’t what happened. The 2-year Treasury yield fell after the official announcement early Friday morning and continued falling throughout the day as I pointed out in Saturday’s post. US rates markets are a much better guide to the consensus on Warsh, not silver or gold, which had gone into a crazy speculative frenzy in the days prior to Friday.

So the set-up into this week is interesting. Many came away from last week with the mistaken impression that Warsh will be hawkish. He can’t and won’t be. In fact, his worst nightmare is probably to have Trump turn on him like he did on Powell. That’s something Warsh will try to avoid at all cost, which means cutting early and hard ahead of the midterm elections in November. It should be possible to do this - I am thinking of a 100 basis points in cuts in the four meetings from June through October - given that a number of people on the FOMC are already flirting with the high productivity, low inflation narrative for the US economy. My best guess is that Warsh will work hard to harness this story and use it to reset the policy rate lower.

Today’s post shows five charts worth tracking as markets digest the news from Friday and move in the direction of more and early cuts from Warsh:

• Market pricing for Fed cuts: the obvious place to start is federal funds futures, which show what markets price for Fed cuts on different horizons. The black line in the chart below shows the midpoint of the Fed’s 25 basis point target range for the policy rate. The blue line shows what futures price for this rate by the end of this year. The latter fell on Friday - a sign US rates markets think Warsh will cut more and earlier - and should keep falling as we move forward.

• US yield curve steepening: as I noted above, the 2-year Treasury yield fell on Friday, consistent with interest futures pricing more and earlier cuts. If markets continue to move in this direction, it signals greater political dominance of the Fed, which should cause investors to demand higher risk premia at the long end of the yield curve. We should therefore see more steepening of the yield curve, which is something that already got going on Friday. The best way to see this isn’t the 10-year yield, which is the blue line in the chart below, but instead to focus on the 10y10y forward yield (orange line). That’s because the 10y10y forward yield cuts out what’s going on in the front end of the yield curve and is therefore a better measure of risk premia at the long end.

• The Dollar should resume its fall: the Dollar rose almost one percent versus its G10 peers on Friday, as the blue line in the chart below shows. My best guess is that a lot of this price action keyed off what was going on with precious metals and that people weren’t paying attention to the dovish signal from rates markets. Indeed, the black line in the chart below is the 2y2y forward interest differential that corresponds to the G10 Dollar index I’m using here. That differential moved lower on Friday and we should see more of that as markets price front-loaded cuts from the Fed. This should exert downward pressure on the Dollar.

• The gold rally should resume: there have been two key catalysts for gold over the past year: geopolitics and the Fed. The announcement of reciprocal tariffs on April 2 saw the first meaningful rise in gold. Chair Powell’s dovish Jackson Hole speech on August 22 then really got the debasement trade going. The underlying driver of this trade - a flight to safety from unsustainable fiscal policy - hasn’t changed one bit, so I’d expect the rally in gold prices to resume in fairly short order, much as it did after the October pullback in precious metals.

• Emerging market currencies will keep rising: rate cuts from the Fed, especially if they’re part of a larger easing cycle, have always been bullish for emerging market (EM) currencies and this time should be no different. The Dollar against EM fell below the range it was in for all of H2 2025 in the wake of the December 10 rate cut, so it looks like EM investors have already been on the lookout for this kind of shift. The Dollar versus EM has a lot further to fall if the kind of realignment in the policy rate I picture actually plays out.