Citadel Securities economist Nohshad Shah suggested in a recent column that the Federal Reserve is likely to maintain interest rates unchanged for the foreseeable future, a prospect that has become more certain with the nomination of Wash as the next Fed Chair. Against a backdrop of resilient U.S. economic performance and resurgent inflation risks, the U.S. dollar, which has declined significantly over the past year, may be poised for a period of respite.
Nohshad Shah indicated that, supported by an almost unprecedented policy mix of loose financial conditions, accommodative monetary policy, and impending large-scale fiscal stimulus (the OBBA Act), the U.S. nominal GDP could range between 5-6% this year. The Dallas Fed's tracking estimate for Q4 GDP growth stands at 2.49%, while the New York Fed's real-time projection is 2.74%, achievements realized even amidst an extended government shutdown.
During last week's meeting, the Federal Reserve acknowledged the reality of stronger economic growth and noted that the balance of risks has shifted away from the employment goal. The FOMC statement upgraded its description of economic activity from "moderate" in December to "solid" expansion, with the unemployment rate showing "signs of stabilizing." Signals conveyed by Chair Powell during the press conference suggested a broad consensus within the Committee that the policy rate is no longer in restrictive territory; following last year's 75 basis points of "insurance cuts," rates are now near most estimates of the neutral rate (approximately 3.25%).
The U.S. dollar has depreciated by approximately 11% over the past year, a substantial decline. However, Shah believes that with the Fed likely remaining on hold for the coming months, widespread acceptance of strong U.S. growth prospects, and a renewed emphasis on Fed independence, "dollar bears should exercise caution at current valuation levels."
The rationale for the Fed holding steady: robust economy and inflation concerns. Nohshad Shah emphasized in the report that the improvement in downside risks related to employment has surpassed the improvement in upside risks related to inflation. Although some concerns persist in the labor market, both consumer spending and business investment are strong, and corporate profits are healthy.
The U.S. economy has once again demonstrated resilience, rebounding robustly from last year's tariff shocks. Under the current policy mix, inflation risks could re-emerge as a focal point in the coming months. Shah stated clearly: "I do not anticipate further rate cuts—certainly not from a Powell-led Fed—perhaps not for an entire year."
During the press conference, Powell reiterated his focus on Federal Reserve independence, and his strategy for managing pressure from the Trump administration appears to be functioning effectively. The early reappointment of regional Fed presidents, a strong direct response to a Department of Justice subpoena, and the immediate pushback from Senator Tillis—who stated he would block confirmation of new Fed governors until the issue is resolved—all suggest the administration's tactics may be counterproductive, failing to achieve the goal of exerting greater control over the Fed to push for more dovish monetary policy.
Will Wash usher in a hawkish era? The nomination of Wash as the next Fed Chair stems, at least partially, from these political dynamics. Wash is widely viewed as a more "establishment" candidate, well-received among traditional Republican lawmakers, which should facilitate a smoother confirmation process.
However, from a policy stance perspective, Wash's historical record indicates he is "significantly more hawkish" than other contenders, consistently prioritizing inflation control over employment considerations. Nohshad Shah pointed out that Wash has low tolerance for expanding monetary easing through unconventional tools like quantitative easing. Under his leadership, interest rate cuts would likely only be implemented if clearly justified by prevailing conditions, alongside continued balance sheet reduction.
Wash has criticized what he perceives as "mission creep" during Powell's tenure, favoring a stricter focus on price stability rather than the broader objectives increasingly falling within the Fed's purview in recent years. This aligns with Treasury Secretary Bessent's criticism of the Fed's "function gain."
Although Wash explicitly supports Fed independence, past remarks suggest he is open to closer coordination with the Treasury and political institutions on broader economic strategy. Recently, Wash also endorsed AI-driven productivity gains, using this argument to support calls for lower interest rates.
Nevertheless, the Fed's institutional structure requires consensus among staff, Board members, and regional presidents to implement new balance sheet or policy rate paths. Given President Trump's well-known preference for lower policy rates, Wash may face the challenge of balancing his historical policy instincts against political pressure for easier policy.
Time for dollar bears to step back? Dollar weakness has been a dominant market theme, driven by a constellation of interrelated factors. Bilateral exchange rate checks by Japan's Ministry of Finance and the New York Fed (representing the U.S. Treasury) triggered yen short-covering but also weighed on the dollar more broadly, as markets focused on risks of a weak dollar policy and speculation surrounding coordinated dollar depreciation.
Nohshad Shah believes the reality is more likely that Treasury Secretary Bessent was simply willing to support the Japanese Ministry of Finance's intervention threats to enhance their effectiveness in curbing rapid yen depreciation, rather than signaling a shift in dollar policy. Nonetheless, comments from President Trump in response to specific questions about the dollar, hinting at his comfort with currency valuations, exacerbated the resulting dollar weakness.
The broad dollar index (DXY) has fallen roughly 11% over the past year, a considerable move. Shah notes that this renewed weakening provides a good opportunity for investors holding long-standing dollar short positions to take profits.
"With the Fed likely on hold for at least the next several months, the prospect of strong U.S. growth gaining broad acceptance, and the aforementioned renewed emphasis on Fed independence, dollar bears should be cautious at current valuation levels," Shah concluded. For investors who view central bank independence as crucial to global financial stability, the Fed's future appears less susceptible to overt political intervention, a positive outcome.
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