Fed Chairman Kevin Warsh is a relative stranger to the bond market, says BofA’s Mark Cabana

Introduces Mark Cabana, co-head of Global Rates Research at Bank of America Securities, to discuss the new Federal Reserve Chairman.

Becky

Mark Cabana

Kevin Warsh is a relative stranger to the bond market as acting Fed Chair, having been gone for 15 years. He wants regime change but his monetary policy leaning is unclear; historically hawkish but recently more dovish, advocating rate cuts and focusing on AI productivity gains.

Unlike Powell, Yellen, Bernanke who grew through the Fed, Warsh is an outsider. This creates a unique setup and potential for volatility.

Asks if the potential for volatility is because Warsh might do something different than market expectations.

Becky

Mark Cabana

Market expects a hold at this meeting, but is pricing in about one hike over the next 6-12 months. The rest of the committee has shifted hawkish and will likely favor rate hikes in the dot plot.

We expect to see a number of Fed officials pencil in hikes for this year.

Oil prices collapsed to $76 for WTI from $90-$100, which might make the Fed less pushed to raise rates.

Becky

Mark Cabana

We still think individuals will pencil in hikes. It's not just an oil story; inflation was 3% before the Iran situation, showing sticky inflation.

Former Fed official Roger Ferguson noted inflation was already an issue.

Mark Cabana

The US consumer has been surprisingly resilient and the labor market may be strengthening despite the commodity shock. If the shock goes away, the economy's resilience becomes even more evident.

The stock market is at or near new highs, which factors into Fed thinking.

Becky

Mark Cabana

It is not clear that interest rates are restrictive in this economy. Financial conditions do not suggest rates are restrictive.

I ask myself the simple question: are interest rates restrictive? The answer is not clear.

Asks where the 30-year mortgage rate will be in six months to a year.

Becky

Mark Cabana

We think mortgage rates will be about flat, around 6.25-6.75%. A Fed hike of 50-75 bps would impact but likely not push rates to a 7-handle.

The housing market has been stagnant and is interest rate sensitive, but AI-related investments are interest rate insensitive. The Fed may want to tap the brakes on that.

Mark Cabana

We have a new Fed Chair who is a relative stranger. We need to hear from Warsh how prevalent the hawkish view is and how much the committee is pushing in that direction versus taking time to see how lower oil prices factor in.

This is a tale of two economies: housing is rate-sensitive, AI build-out is not.

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