Fed's Warsh may cut rates twice by October, contrarian analyst argues

Academy Securities analyst Peter Tchir argues Fed Chair Kevin Warsh's hawkish debut was a calculated smoke screen — one that could end with rate cuts in September and October, just ahead of the US midterm elections.

"Warsh had to sound hawkish to draw a clear line between himself and the White House, but the data path is being prepared for cuts," Tchir, head of macro strategy at Academy Securities, said in a report published Monday.

The 10-year Treasury yield has already fallen to 4.37% from 4.46% after Warsh's June 17 press conference, even as CME FedWatch data shows investors pricing 77% odds of a quarter-point or more rate hike by year-end. Tchir points to Truflation's real-time core inflation gauge, which stands at about 1.45% and has remained below 1.8% since February, as evidence the inflation narrative is shifting faster than official data captures.

If Tchir's thesis proves correct, the implications are significant: a repricing of short-end Treasury yields, a steepening yield curve, and a potential rotation out of sectors that have benefited from rate-hike expectations. The next test comes July 14, when the June CPI report is released.

The Inflation Data Debate

Tchir's argument rests on a fundamental challenge to how the Fed measures inflation. He contends that the personal consumption expenditures price index — the Fed's preferred gauge — is not the metric Warsh's Fed will prioritize. Instead, he sees the Cleveland Fed's New Tenant Repeat Rent index, which tracks real-time rental data more closely aligned with Zillow's readings, as a potential alternative that could justify lower rate settings.

The owner's equivalent rent component of CPI, which peaked at about 8% in mid-2023, has been a persistent source of upward pressure. But Zillow's rent data hit nearly 16% in early 2022 and has since moderated sharply. "The Fed can switch to its own Cleveland Fed index without importing external data," Tchir wrote, "and that alone could provide the cover for a pivot."

Brookings Institution senior fellow Robin Brooks echoed the skepticism around Warsh's hawkish posture. "Last week's FOMC meeting was largely performative, seeing as this was Kevin Warsh's first appearance as Fed chair," Brooks wrote in a Substack post Thursday. "He had to sound hawkish to draw a clear line between himself and the White House."

The Political Calculus

The political dimension is impossible to ignore. Tchir sketches a scenario in which Warsh convinced President Donald Trump that overt dovishness would be counterproductive. By appearing hawkish, Warsh could suppress long-end yields, maintain the appearance of Fed independence, and let Wall Street analysts and media build rate-hike expectations. Then, as data cooperates, the Fed pivots to a "data-driven" rationale for cuts — with the added benefit of blaming the previous Fed for using wrong data and acting too late.

The fed funds rate currently stands at 4.25% to 4.50%, unchanged since a 25-basis-point cut in September 2025. OIS markets have priced in about 1.25 rate hikes by year-end, a view that Bank of America reinforced Monday when it predicted three increases this year. Tchir's counter-thesis: two cuts by October, timed before the midterm elections.

Citi Research chief US economist Andrew Hollenhorst, who has long maintained that monetary policy will loosen, sees similar dynamics. "In contrast to market pricing, we continue to see data and developments as pointing toward an economy that, rather than rate hikes, is more likely to require rate cuts," he wrote Friday. He noted that real consumer spending was revised down to a multi-year low in the first quarter and that excluding AI-related investments in computers, electronics, and intellectual property, GDP growth would have been just 0.5%.

What Comes Next

The June jobs report, due in the coming days, will be the first major data point. Hollenhorst expects payrolls to lose momentum this summer, with weekly jobless claims already trending higher. "It will likely take the unemployment rate rising for the market to go back to pricing in cuts," he said.

For investors, Tchir sees the clearest opportunity in the short end of the Treasury curve, recommending long positions in short-dated government bonds to bet on front-end yield declines. On the equity side, he advises overweighting energy — particularly global nuclear assets — and underweighting semiconductors, while warning that large-cap tech companies face potential dilution from secondary offerings.

The last time the Fed faced a similar disconnect between hawkish rhetoric and market pricing was in late 2023, when Chair Jerome Powell's "higher for longer" message was followed by 75 basis points of cuts over the subsequent six months as inflation cooled faster than projected.

This article is for informational purposes only and does not constitute investment advice.