The research report from Guotai Haitong Securities highlights that while Kevin Warsh's policy inclinations may be evolving, the underlying dilemma surrounding Federal Reserve independence remains unchanged. For U.S. Treasuries, the advice is to prioritize defense, maintain a neutral duration, and control volatility.
Historical patterns surrounding Federal Reserve chair transitions reveal their impact on the bond market primarily through three dimensions: heightened yield volatility, adjustments to the yield curve's shape, and a reassessment of risk premiums. The 6-12 month window before and after a transition typically sees the highest policy uncertainty, as markets harbor doubts about the new chair's policy stance, communication style, and independence. This uncertainty directly translates into increased bond market volatility and wider liquidity premiums. Examining yield trends, market performance during transition periods exhibits a clear "scenario-dependent" characteristic. During the Greenspan-Bernanke handover in 2006, the 10-year Treasury yield fluctuated within a narrow 30-basis-point range in the three months surrounding the transition, indicating strong policy continuity. The Bernanke-Yellen transition in 2014, occurring during the early stages of QE tapering, saw the 10-year yield rise from 2.7% before the handover to 3.0% by year-end, reflecting market repricing of the policy normalization path. When Yellen handed over to Powell in 2018 amid strong economic growth and rising inflation, the 10-year yield climbed rapidly from 2.4% to 3.2%, accelerating the curve flattening trend as markets worried the new chair would continue a gradual hiking cycle leading to inversion. Regarding the yield curve's shape, transitions often trigger structural adjustments in term spreads. Historical data shows that if a new chair is perceived as "dovish" by the market, the short end is suppressed more by rate cut expectations, steepening the curve; if perceived as "hawkish," the long end rises faster due to inflation concerns, initially steepening then flattening the curve. After Powell took office in 2018 and continued hiking, the 2s10s spread narrowed from 50 basis points to under 20 basis points, eventually inverting in 2019 and forcing the Fed to pivot to cuts. This feedback loop of "transition -> policy expectations -> curve adjustment -> policy correction" is a recurring historical pattern. In terms of risk premiums, the Treasury volatility index (MOVE Index) typically rises 15-25% during transition periods, reflecting increased market divergence over the policy path. If the new chair is an internal Fed appointment or continues the predecessor's policy framework, the premium increase is relatively moderate; if an external candidate with strong political affiliations, market concerns over independence significantly push up term and liquidity premiums. Although Powell was an external candidate in 2018, strong policy continuity meant the MOVE index only spiked briefly before receding. Conversely, after Volcker's appointment in 1979 and his aggressive policy shift, bond market volatility remained elevated for two years. The 2026 transition environment is more complex: sticky inflation, a paused rate-cutting cycle, geopolitical risks, and tariff policies are intertwined, compounded by Trump's persistent pressure on Fed independence, making markets highly sensitive to the new chair's policy stance.
Kevin Warsh, 55, is a quintessential elite with experience spanning Wall Street, the White House, and the Federal Reserve. His career began in Morgan Stanley's M&A department, where he served as Vice President and Executive Director from 1995 to 2002. In 2002, he entered the George W. Bush administration, serving as Executive Secretary of the White House National Economic Council and Special Assistant to the President for Economic Policy, overseeing domestic finance, banking, and securities regulation, and acting as the chief liaison between the administration and independent financial regulators. In February 2006, Bush nominated him to the Federal Reserve Board of Governors; at 35, he became the youngest governor in the Fed's history, serving until March 2011. During his tenure, he served as the Fed's G20 representative, special envoy to Asian economies, and administrative governor (responsible for personnel and financial management). During the financial crisis, he was a member of Bernanke's inner circle, acting as an intermediary between the central bank and Wall Street CEOs. After leaving the Fed, Warsh served as a visiting scholar at Stanford Graduate School of Business, a distinguished visiting fellow at the Hoover Institution, and authored a report on monetary policy reform for the Bank of England, recommendations from which were adopted by the UK Parliament. Regarding policy stance, Warsh is a staunch "balance sheet hawk" and "inflation hardliner." In recent interviews, he explicitly stated that "inflation is a policy choice, not an exogenous shock," directly attributing full responsibility for the 2021-2023 high inflation to the Fed (rather than supply chains or geopolitical conflicts). His core critique focuses on "complacency": he believes the Fed mistakenly declared inflation dead during the "Great Moderation" era and failed to exit stimulative policies during the stable 2010-2020 period, leading to the necessity of breaching more red lines when a real crisis (the pandemic) hit, sowing the seeds of inflation. Warsh argues the Fed has deviated from its core price stability mission, suffering from "institutional drift," and requires "renewal, not revolution" style reforms. On monetary policy operations, Warsh has previously advocated for aggressive quantitative tightening (QT) to create room for rate cuts—essentially, "printing less money can allow for lower interest rates." This strategy has been interpreted as a compromise with Trump's demands for rate cuts—allowing short-term cuts while回收 liquidity via QT to prevent inflation from rebounding. Warsh has consistently opposed the normalization of QE, arguing as early as 2009, with unemployment at 9.5%, that the Fed should begin exiting accommodative policies, warning that excess reserves could trigger an unexpected credit surge. During the QE2 debate in 2010, he held "substantial reservations," believing monetary policy had reached its limits and additional bond purchases risked inflation and financial stability. Market analysis suggests a Warsh-led Fed would push for faster rate hikes and MBS sales, significantly raising the bar for future QE and lowering the pricing of bond term premiums. The core of his policy philosophy is "the Fed and Treasury each minding their own roles": the central bank manages interest rates, the Treasury Secretary manages fiscal accounts, resolving debt interest burdens through a "new accord," rather than blurred intermingling.
Warsh's recent policy inclinations have shown a significant shift, moving from a traditional inflation hawk to supporting rate cuts, sparking intense debate about his true stance. Investors anticipate a steepening yield curve upon his nomination, reflecting market concerns over his hawkish history. However, some views interpret this shift as "signaling rather than conviction"—a strategic adjustment by a candidate to align with presidential policy preferences before nomination, seen as more pragmatic than post-appointment pressure; essentially, "the wise adapt to circumstances." The theoretical underpinnings of his shift are based on two main points. First, the AI-driven disinflation narrative. In a November 2025 Wall Street Journal op-ed, Warsh emphasized that AI would act as a "powerful disinflationary force" by boosting productivity and enhancing U.S. competitiveness, arguing the Fed should "abandon predictions of stagflation in the coming years." He criticized the "dogmatic belief that workers earning too much causes inflation," attributing inflation to "government overspending and excessive money printing" rather than an overheated labor market. Second, the policy combination of "QT配合降息". In July 2025, Warsh stated that significantly shrinking the balance sheet could "turbocharge the real economy," achieving a structural rate-cutting effect, noting "we are in a housing recession, with 30-year fixed mortgage rates near 7%." However, the market questions the sustainability of his shift. Analysis generally points out that Warsh's "hawkish monetarist" stance could lead to a more cautious policy pace. Notably, during his 2006-2011 tenure, Warsh called for rate hikes even at the depths of the financial crisis. This anti-inflation instinct contrasts sharply with his current support for cuts. If 2026 inflation data fails to recede as expected, or the AI productivity boost fails to materialize, the probability of Warsh reverting to a hawkish stance would rise significantly.
Trump's influence on the Fed has escalated from "Twitter pressure" during his first term to "systematic transformation" in his second. Currently, three of the seven Board seats are his nominees: Michelle Bowman and Christopher Waller appointed during his first term, and Stephen Miran, who took office in August 2025. However, their independence shows significant divergence: Bowman and Waller refused to follow Miran's aggressive 50-basis-point cut proposal at the September 2025 meeting, voting in line with Powell, which Harvard economist Jason Furman called a "positive signal for Fed independence." In contrast, Miran's stance aligns closely with the White House; a 2024 report he co-authored for the Manhattan Institute explicitly argued that "Fed independence is obsolete," suggesting the President should have the power to fire Fed officials at will. This divergence reflects an evolution in Trump's nomination strategy: first-term nominations showed relative respect for professional background and academic stance—Bowman and Waller, though seen as "dovish," maintained technocratic independence. The second term has shifted to "political loyalty first." Miran's background as an economic advisor and his endorsement of presidential tariffs and tax cuts signify a shift in nomination criteria from "policy倾向" to "political alignment." Trump has also attempted to threaten Powell with a Justice Department investigation and accused Biden nominee Lisa Cook (who denies the allegations) of mortgage fraud—the first time in the Fed's 112-year history a president has tried to remove a governor. Warsh's nomination, however, seems to differ from Trump's logic of increasing influence. Unlike Miran's role as a "presidential mouthpiece," Warsh is an "anti-establishment hawk"—he opposes the Fed's excessive accommodation and mission drift, not服从 presidential rate-cut orders. This creates an inherent contradiction for Trump: the President wants "fast and frequent cuts" to stimulate growth and reduce debt interest burdens, but Warsh advocates for "slow cuts and fast QT" to contain inflation. History shows that strong chairs can override the majority; both Greenspan and Volcker isolated dissenting votes and dominated policy direction. If Warsh takes office, his "zero tolerance for inflation" stance could attract Bowman and Waller back to the hawkish camp,反而边缘化 Miran-style doves, shifting the FOMC voting dynamic from "dove-hawk equilibrium" to "hawkish dominance." We believe Trump's choice may relate to three points: 1) Warsh's shift to supporting rate cuts. Since the second half of 2025, Warsh has gradually shifted towards supporting rate cuts in multiple public appearances, emphasizing that the productivity gains from the AI technology revolution will effectively ease supply constraints, thereby creating space for looser monetary policy. This evolution contrasts sharply with his previous staunch inflation hawk image, showing a pragmatic adjustment in his policy thinking. 2) Enhancing policy credibility and market confidence. Compared to单纯的 dovish statements, Warsh's rate-cut support argument, based on the logic of technological progress, is more persuasive in terms of credibility and maintaining market confidence, likely gaining greater recognition from Trump and Treasury Secretary Besant. This narrative aligns with the administration's goal of promoting economic growth while avoiding inflation concerns associated with excessive easing. 3) Providing policy risk buffer space. From a political economy perspective, the Fed remains an important mechanism for dispersing policy responsibility for Trump. Warsh retains the professional底色 of monetary policy prudence while预留 policy flexibility to配合 the White House's economic agenda. This微妙平衡 of "principle and adaptability" can maintain basic market confidence in central bank independence while providing explanatory room if economic policies fall short, achieving risk-sharing between administrative and monetary policy.
Looking ahead, a Fed under Warsh's leadership may exhibit three key characteristics: 1) Intensified independence paradox increasing policy uncertainty. Whether Trump can tolerate a "disobedient hawkish chair" remains unknown. Historical experience shows that once appointed, Fed chairs often gradually demonstrate independence based on professional reputation and institutional interests. The 2018 public conflict between Powell and Trump is a precedent—although Powell was also a Trump nominee, his insistence on a hiking path ultimately provoked strong White House dissatisfaction. If Warsh faces renewed White House pressure for cuts, his强硬抵抗 could trigger a replay of the 1970s Nixon-Burns conflict, plunging bond markets into a dual dilemma of "policy credibility discount" and "political intervention premium." 2) Gradual收敛 of the rate-cut path and "dovish first, hawkish later" risk. Based on Warsh's latest statements, he emphasizes the need for利率 policy to maintain "flexible adjustment" space, without explicitly committing to sustained cuts. Combined with the signal from the January meeting to hold rates steady, and Warsh's long-standing vigilance against inflation risks, the pace of rate cuts in 2026-2027 will likely slow significantly, with the actual magnitude of cuts potentially well below previous market expectations. More notably, Warsh may exhibit a "dovish first, hawkish later" policy trajectory—releasing relatively温和 signals early in his term to stabilize market expectations and consolidate his position; but as his influence within the Fed system grows, his independent stance is expected to gradually emerge. Referencing his history of advocating for exiting accommodation even with 9.5% unemployment in 2009, the threshold for Warsh pivoting to tightening could be far lower than market expectations if inflation shows signs of rebounding. 3) Aggressive QT削弱 bond market support. Accelerated MBS sales and the cessation of reinvestment for maturing Treasuries will proceed, removing the Fed's "implicit bid" for long-end bonds, leading to a dual rise in term and liquidity premiums.
The Fed's January 28th FOMC meeting decision to maintain the federal funds rate target range at 3.5%-3.75% was in line with market expectations, formally pressing pause on the rate-cutting cycle initiated in September 2025. The decision passed with 10 votes in favor, but notably, members Miran and Waller dissented, favoring a 25-basis-point cut, reflecting lingering internal divergence on the policy stance. Judging by changes in the statement's wording, the Fed's policy天平 clearly tilted towards fighting inflation. The statement noted economic activity is expanding at a solid pace, upgrading the growth assessment from December; the labor market description changed from "job gains have slowed" to "job gains have remained low, and the unemployment rate has shown signs of stabilizing," removing the previous phrase that "risks to the labor market were greater than risks to inflation," indicating the FOMC's balancing of its dual mandate is becoming more even. The inflation assessment maintained the "somewhat elevated" judgment,暗示 the convergence of core PCE towards the 2% target has stalled. On forward guidance, the statement continued cautious wording, removing explicit dovish倾向性表述. This aligns with signals from the December meeting about slowing the pace of cuts, interpreted by markets as a wait-and-see stance至少 through the first half of the year. The statement特别强调 that uncertainties in the economic outlook remain elevated, a委婉表达 for the难以量化 impact of tariff policies,预留 ample flexibility for future policy adjustments. On technical operations, the Fed maintained the interest rate on reserve balances (IORB) at 3.65%, the overnight reverse repurchase rate (ON RRP) at 3.5%, and continued reinvesting only the principal from maturing securities in short-term Treasuries, reflecting that the QT process has not halted due to the pause in cuts. Overall, the core signal from this meeting is: against a backdrop of coexisting inflation stickiness and economic resilience, the Fed chooses to "wait and see," awaiting more data to verify the inflation downtrend, with a reassessment of the timing for cuts not expected until at least the second quarter.
The Fed's assessment of the economic fundamentals was明显上调 from the December meeting, providing the core support for holding steady. On the real economy, the U.S. Bureau of Economic Analysis (BEA) revised Q3 2025 GDP growth to an annualized rate of 4.4%, up 0.1 percentage points from the initial estimate, marking the strongest growth since Q3 2023. Sequentially, real GDP accelerated from 3.8% in Q2 to 4.4% in Q3, driven primarily by consumer spending (contributing 2.34 percentage points), a rebound in exports (contributing 1.00 percentage points), and recovering government spending. Notably, real final sales (excluding inventory changes) grew at 4.5%, indicating strong internal economic momentum, not a "虚胖" driven by inventory accumulation. The labor market shows a微妙平衡 of stabilization without overheating. Data from the Bureau of Labor Statistics (BLS) shows nonfarm payrolls added only 50,000 jobs in December 2025, with a cumulative annual increase of 584,000, far below the 2 million increase in 2024. The unemployment rate held steady at 4.4%, slightly up from 4.1% in December 2024, but the number of long-term unemployed increased by 397,000 year-over-year to 1.9 million, with the long-term unemployment share rising to 26.0%. The labor force participation rate and employment-population ratio stabilized at 62.4% and 59.7% respectively, indicating a move towards labor market equilibrium. Wage growth remained resilient, with average hourly earnings in the private sector rising 3.8% year-over-year, and a 0.3% monthly increase in December to $37.02, supporting consumer capacity without triggering a wage-price spiral. The inflation path remains the biggest policy constraint. BEA data shows the Q3 PCE price index and core PCE price index rose 2.8% and 2.9% respectively, both above the Fed's 2% target. CPI data showed a 2.7% year-over-year increase in December, remaining in the 2.7%-2.9% range for several months, indicating clear core inflation stickiness. The statement's removal of the phrase "progress has been made toward the 2 percent inflation goal" and its replacement with "inflation remains somewhat elevated"暗示 the disinflation process has stalled. Tariff policies represent the greatest uncertainty, with Trump administration tariff announcements already pushing CPI up for several consecutive months in H2 2025, albeit to a lesser extent than markets feared. Overall, the Fed faces a dilemma of "coexisting growth resilience and inflation stickiness." Economic data supports pausing rate cuts, but leaves ample data-dependent space for future policy adjustments.
Against the backdrop of Warsh's nomination and significantly elevated uncertainty regarding the rate-cut path, asset allocation should focus on "symmetric pricing and two-way defense," rather than a single bet on either "the end of cuts" or "rapid re-easing." On the duration dimension, it is recommended to keep portfolio duration neutral to slightly long: 1. Given that rates have already fallen significantly but inflation and policy path upside risks remain, excessive duration extension offers limited value.适度 extending duration to the 3-5 year range is beneficial for capturing combined coupon and capital gains in a "moderate cutting" scenario. 2. For curve strategy, a "relatively bullish on the middle segment,适度 defensive on the long end" approach can be adopted, hedging against bidirectional risks of potential steepening and renewed flattening. 3. Regarding credit and spreads, it is advised, under a generally neutral overall risk appetite premise, to适度收 credit risk exposure,优选 high-grade credit bonds with sound fundamentals, high cash flow visibility, and moderate financial leverage, while avoiding low-rated varieties highly sensitive to利率 and the economic cycle. During phases of heightened two-way uncertainty in rates and the economy, moderate duration contribution should take priority over credit beta contribution, but portfolio duration needs to be controlled within the 3-5 year range to avoid excessive interest rate risk exposure. 4. Simultaneously, consider allocating a certain proportion of floating-rate bonds and inflation-linked bonds to hedge against the tail risk of "resurgent inflation forcing hawkish policy." 5. For liquidity management,适度 increase the proportion of cash and highly liquid short-term securities to预留机动空间 for subsequent repricing of risk-free rates. Operationally, employ phased positioning and rolling adjustments, monitoring data and policy implementation progressively, to avoid path risk associated with one-time directional heavy positioning.
Risks include market volatility exceeding expectations, economic data surprising, geopolitical conflicts worsening beyond expectations, and historical experience proving invalid.
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