The Federal Reserve is expected to keep the Fed Funds Rate unchanged at 3.50–3.75%, with Jerome Powell set to hold his final press conference as Chair. Discussion centres on Kevin Warsh’s policy approach, including focus on trimmed-mean inflation and AI-related productivity gains.
On 24 April, the Department of Justice dropped its probe into the Fed’s building renovations. This was followed by Republican Senator Thom Tillis moving from blocking to endorsing Warsh on 26 April, which affects Powell’s decision on whether to remain a Governor until January 2028.
Policy Framework Shift
Warsh has proposed shifting emphasis away from core PCE inflation towards trimmed-mean inflation, while also pointing to AI productivity and a barbell approach of lower interest rates alongside balance-sheet reduction. The argument frames energy-price risks linked to war as less central to the policy outlook.
The approach is compared with Alan Greenspan’s move towards the Core PCE deflator in the 1990s, when it ran lower than CPI and was used to support a more accommodative stance during productivity gains. The piece also states the USD could lose its haven premium if data point to an oil supply glut that supports the next Chair’s policy shift.
With the Federal Reserve holding rates steady at 3.50-3.75%, the immediate focus for us has shifted to the upcoming change in leadership. Jerome Powell is on his way out, and Kevin Warsh is poised to take over, signaling a significant policy pivot away from what we saw through 2025. This transition is the most critical variable for positioning in the weeks ahead.
The incoming Chair’s framework is a major departure, as he intends to sideline core PCE in favor of trimmed-mean inflation and AI-driven productivity gains. Recent data supports this view, with the Dallas Fed’s Trimmed Mean PCE rate for March 2026 falling to 2.4%, well below the headline PCE rate of 2.9%. This gives Warsh the justification he needs to advocate for lower rates even if other inflation measures remain elevated.
Market Positioning Implications
This proposed strategy of cutting rates while shrinking the balance sheet is already being priced into the market. Fed funds futures now indicate a greater than 75% probability of a 25 basis point rate cut by the July meeting. We should therefore consider positioning in interest rate derivatives, such as SOFR futures or options, that will profit from a decline in short-term rates sooner than previously expected.
Warsh’s argument mirrors the Alan Greenspan era of the late 1990s, where a productivity boom allowed for a more accommodative policy. First-quarter 2026 productivity numbers came in at a robust 3.5% annualized rate, bolstering the case that AI is creating deflationary pressures that can offset inflation. This historical parallel suggests a period of lower rates alongside a strong economy, a favorable environment for risk assets.
Furthermore, the US dollar’s status as a safe haven is eroding as the energy shock from last year subsides. WTI crude prices have recently fallen below $80 per barrel from over $90 earlier in the year, as concerns shift toward a potential supply glut from increased non-OPEC production. This development removes a key pillar of dollar strength.
Given these dynamics, we see opportunities in currency options that bet against the dollar, particularly against currencies with central banks that are likely to remain hawkish. At the same time, we should look at trades that benefit from falling interest rate volatility, as the new Fed leadership appears to be telegraphing a clear and predictable path toward easing. This suggests selling straddles on Treasury futures could be a viable strategy.
