Rabobank’s Philip Marey said Kevin Warsh’s nomination as Federal Reserve Chair suggests lower US policy rates in 2026. The view is for three 25-basis-point cuts in 2026.
That path would take the federal funds rate slightly below the median Federal Open Market Committee estimate of the neutral rate. Marey also said Warsh may try to convince other FOMC members to lower their neutral-rate forecasts, using an argument tied to artificial intelligence.
Balance Sheet And Long Term Yields
The note said Warsh supports shrinking the Fed’s balance sheet and may want to shift the operating framework from ample reserves to scarce reserves. It also warned that longer-term yields could rise even as policy rates fall.
The article linked this possible rise in longer-term rates to housing conditions, calling it a “housing recession”. It also said the piece was produced with help from an artificial intelligence tool and reviewed by an editor.
Because the new Fed Chair is signaling a more dovish stance, we are positioning for lower short-term interest rates. Markets are increasingly pricing in three 25-basis-point cuts in 2026. This view is supported by January Core PCE inflation, which eased to 2.8%. Traders may want to use SOFR futures to benefit from an expected decline in the policy rate.
However, the plan to shrink the Fed’s balance sheet creates a key tension that could push longer-term yields higher. This may set up an opportunity for yield-curve steepener trades: long the 10-year Treasury yield and short the 2-year. We saw the setup for this trade build through the second half of 2025 as the market absorbed this policy split.
Positioning For Higher Volatility
This mix of rate cuts and quantitative tightening could drive higher market volatility. The bond market’s MOVE index has already risen to 115, a clear jump from the calmer levels late last year. We think buying options that gain from larger price swings—especially in Treasury ETFs—is a sensible way to prepare for the next few weeks.
The stated aim of this approach is to ease the housing recession that lasted through 2025. January’s existing home sales, running at a weak 3.95 million annual rate, underline the urgency. We are watching mortgage-backed securities closely, because their performance will show whether rate cuts can offset the upward pressure on mortgage rates caused by a shrinking Fed balance sheet.
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