Federal Reserve Chairman Kevin Warsh's hawkish stance may be an elaborate smokescreen.
Academy Securities analyst Peter Tchir suggests in a recent report that while markets are currently pricing in a 75% probability of a September rate hike and expecting 1.25 cumulative hikes by year-end, they are overlooking a genuine pathway to a September rate cut—a path that Warsh himself might be quietly constructing.
Tchir points out that Warsh's signals have been clear enough: using hawkish rhetoric to suppress tail risks in long-term rates (the 10-year Treasury yield has retreated from 4.46% to 4.37% this week), while leaving room for a subsequent narrative shift based on data. In his view, the culmination of these maneuvers could be a rate cut in September, followed by another in October, conveniently timed before the midterm elections.
This assessment remains a personal viewpoint, and Tchir himself acknowledges the uncertainty. However, his argument is logically structured, covering a redefinition of inflation data, a contest for control over the narrative on the neutral rate, and the core premise that the White House's policy objectives have never changed.
Is Hawkishness Just a Performance? Political Logic Points to Cuts
The starting point of Tchir's argument is a political-economic interpretation of Warsh's motivations.
He believes the fundamental policy goals of the Trump administration have never shifted. The President himself has repeatedly expressed a deep understanding of real estate and the importance of low interest rates for the property market. Against this backdrop, it is difficult to imagine Trump being satisfied with a persistently hawkish stance from the Fed Chair he personally nominated—unless it is part of a negotiated strategy.
Tchir paints a hypothetical scenario: Warsh convinces Trump that sending dovish signals now would be disastrous. By having Warsh appear hawkish, it can suppress long-term yields, maintain the appearance of Fed independence, and allow Wall Street analysts and media to fully pivot to expecting rate hikes. Later, as data gradually "cooperates," the Fed can pivot to cutting rates under the guise of being "data-driven," and can then blame inflation problems on the previous Fed for "using the wrong data and acting too late."
He adds that Warsh's father-in-law is a major Trump donor, a background that may not be irrelevant.
Targeting Inflation Data: PCE Is Not This Fed's Preferred Gauge
The most substantive part of Tchir's argument involves a systematic questioning of the current inflation measurement framework.
He states explicitly that the PCE is not the preferred inflation indicator for Warsh's Fed. In his view, the PCE was more a preference of the Bernanke era, and Warsh is not the type to lose sleep over PCE data.
His criticism is particularly sharp regarding the measurement of housing inflation. The "Owners' Equivalent Rent" (OER) component of the CPI didn't peak until mid-2023, at around 8%; whereas Zillow's rent data had already hit a high near 16% in early 2022. He notes that the Cleveland Fed has developed the "New Tenant Repeat Rent Index" (NTRR), whose trend closely aligns with Zillow's, yet this more realistic indicator has received almost no attention.
His conclusion is that the Fed could, without introducing external data, switch to using the index developed by its own Cleveland Fed branch, thereby providing a data-based justification for rate cuts.
Truflation and "The Low Twos Are Good Enough"
Beyond the PCE, Tchir also cites Truflation's real-time inflation data. He explains that Truflation constructs a daily inflation index based on a vast set of real-time data, with its core inflation rate currently around 1.45%, having remained below 1.8% since February of this year.
He also notes that Warsh has recently hinted that the "big number" (the whole number) of the inflation figure is more important than the precise decimal. Tchir infers from this that the market may be gradually being "conditioned" to accept a cognitive framework where "the low twos" is equivalent to being close to the 2% target. On his charts, he has marked the inflation target line at 2.9%, not the traditional 2%.
He believes that once the data narrative is successfully switched, the technical barriers to cutting rates will be significantly lowered.
Tchir also mentions the work of former Fed insider Miran on the neutral rate issue. He believes that while no one in the market is discussing the neutral rate currently, this topic will resurface at an opportune time.
His logic is that the neutral rate itself is difficult to measure precisely, with a considerable estimation range. If the new Fed leadership can argue that the previous Fed's assessment of the neutral rate was too high, that alone could provide theoretical justification for 50 to 100 basis points of rate cuts, while attributing the blame to "the old Fed's mistake."
Apple's Price Hike and AI Inflation: Rate Hikes Are Aiming at the Wrong Target
Addressing market concerns about AI-driven inflation, Tchir offers a counter-interpretation.
He points out that after Apple (AAPL) recently announced price increases, its stock price fell, a market reaction that precisely indicates consumer tolerance for price hikes is being questioned. If even a top-tier consumer goods company like Apple struggles to have its price increases absorbed by the market, the pricing power of ordinary consumer goods firms would be even weaker—contradicting the narrative of persistently heating inflation.
He also cites feedback from a chip company: memory prices have not surged due to AI demand, with some products even being cheaper than five years ago. He argues that AI and data center construction spending are indeed inflationary, but this is a completely different dimension from the affordability issues faced by ordinary consumers.
More critically, he believes rate hikes have almost no dampening effect on AI/data center spending—tech companies trading at 100 times valuation are utterly insensitive to a 50-basis-point move in rates. Those truly hurt by higher rates are ordinary borrowers who have no connection to AI-driven inflation.
Based on the above judgments, he believes markets will begin to reprice rate cut expectations, with the most certain opportunity lying at the short end of the yield curve—going long short-term Treasuries to bet on falling front-end yields. For the long end, he maintains a neutral to slightly bullish stance, believing that Treasury Secretary Besant wants the 10-year yield back in the "3-handle," and Warsh has already removed tail risks at the long end through his hawkish posture.
Regarding equities, he recommends a significant overweight in the energy sector, particularly global nuclear power assets; within the Defense & Security (ProSec) theme, he suggests overweighting biotech/pharmaceuticals and underweighting chips. He is cautious on AI and data center valuations and warns that potential equity issuance pressure from large tech companies could weigh on their stock prices.
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