Central-bank divergence & liquidity-regime indicators
Key Questions
Who is Kevin Warsh and what is his role at the Fed?
Kevin Warsh is the new Fed Chair who is advocating for a deliberate shift in monetary policy. He aims to reduce the central bank's balance sheet from $6.7T toward a scarce-reserves regime.
What does the scarce-reserves regime involve?
It entails quantitative tightening (QT) with changes to repo and fed-funds operations that could trigger liquidity shocks. This moves away from the current abundant reserves environment.
What was Waller's stance on Warsh's first day?
Waller adopted a hawkish tone as the last dove on the FOMC signaled no near-term cuts. This contributed to the 10-year Treasury yield rising to 4.67%.
What are Pantheon's forecasts for Fed rate cuts?
Pantheon Macro expects rate cuts to begin in December 2026, differing from prevailing market expectations. The outlook is detailed in their latest US Chartbook.
What risks has the Fed flagged regarding markets?
The Fed has highlighted concerns over asset valuations, leverage levels, private credit exposures, and AI-related debt. These are seen as potential vulnerabilities in the current environment.
How might Warsh's policies affect asset valuations?
The planned balance sheet reduction and regime shift could lead to repricing across markets. Related analysis examines impacts on liquidity and valuations under the new leadership.
What liquidity tools is the Fed considering?
NY Fed's Perli noted that the rate control toolkit can manage lower reserve demand. This supports a transition while maintaining effective policy implementation.
Are there any related international policy responses?
The RBI may draw on its 2013 taper tantrum playbook to support a weakening rupee amid global central bank shifts. This reflects broader spillovers from Fed actions.
Kevin Warsh new Fed Chair pushes deliberate QT from $6.7T toward scarce-reserves regime with repo/fed-funds shifts and liquidity shocks. Waller hawkish on first day; 10Y at 4.67%. Pantheon calls for Dec 2026 cuts; Fed flags valuations, leverage, private credit and AI debt risks.