The Fed’s Course Under a New Chair

The Federal Open Market Committee's first meeting of 2026 resulted in a "dovish hold," signaling an ongoing easing bias despite a temporary pause in rate cuts. While current economic data remains solid and inflation stable, the committee maintains an expectation for lower rates over time. The potential leadership transition to Kevin Warsh introduces questions regarding the Fed's future footprint, specifically concerning his preference for a smaller, less "bloated" balance sheet and a more restrained communication strategy. Although a radical shift in the near-term interest rate reaction function is unlikely due to the committee's consensus-based structure, a move toward less transparency could increase market volatility and drive up risk premiums for U.S. Treasuries. Additionally, Chair Powell's future remains uncertain as a DOJ subpoena may influence him to extend his term as a governor to oversee the information request.