Macro & Strategy - March 2026

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It’s a long way to the top if you wanna rock ’n’ roll

A new chapter at the Fed: Kevin Warsh and the Balancing Act ahead

“I tell you, folks, it’s harder than it looks
It’s a long way to the top if you wanna rock ’n’ roll”
– AC/DC

A new era is set to begin in Washington

The nomination of Kevin Warsh to serve as Federal Reserve Chair brings long - awaited clarity after months of speculation and an unusually extended period of institutional drift . Warsh is no newcomer. He joined the Board in 2006 at only 35 years old, becoming the youngest Governor in the institution’s history. His first term was defined by the Great Financial Crisis, during which he earned broad respect for helping guide the Fed through extraordinary turbulence.

His departure in 2011 stemmed from his opposition to QE 2, the $600 - billion expansion of the quantitative easing program. That disagreement marked the end of his first chapter at the Fed. Fifteen years later, he is preparing to return at the top, this time as the person setting the tone for the entire institution.

But important questions remain. When will Warsh be officially confirmed by the Senate Committee on Banking, Housing, and Urban Affairs? Will the Department of Justice retract its probe of Jerome Powell? When and how will the Lisa Cook case end? And how long will Powell stay on, once the transition begins? Investors would do well to think twice before betting on a smooth ride down the yield curve.

The Fed’s cutting debate is less obvious than it appears

It’s no secret that President Donald Trump wants lower interest rates.

And so, Warsh comes in with a mandate to cut the policy rate. The market expects about 50 basis points of rate cuts in 2026 , from a combination of labour - market worries and political pressure. But the backdrop for 2026 rate decisions is far less straightforward than markets often assume. Warsh will have to work hard to convince his colleagues that cutting rates is appropriate.

Highlights

• Upcoming new Fed Chair Kevin Warsh's plans for a clean and rapid easing cycle in 2026 is unlikely to unfold.
• Markets may be too optimistic about the outlook for rates, underestimating the risk of higher long-term yields and more volatility.
• We maintain an overweight in international equities, remain cautious on long - duration bonds, and keep exposure to commodities, particularly base metals.

The narrative of an imminent easing cycle tends to rely on a mental model whereby inflation glides steadily toward target and growth cools just enough to reassure policymakers. Reality has been more complicated. Economic surprises have remained persistently positive, suggesting that the economy’s underlying momentum is still stronger than forecasters expect.

When upside surprises become the norm rather than the exception, it becomes harder for the Fed to justify pre - emptive rate cuts. Policymakers may feel compelled to wait for clearer evidence that the disinflation process is secure and that underlying demand is settling into a more sustainable trajectory.

In fact, leading indicators are pointing to steadily higher inflation in the year ahead. This dynamic is reinforced by financial conditions that remain accommodative by most historical standards.

This dynamic is reinforced by financial conditions that remain accommodative by most historical standards.

Equity markets continue to trade at high multiples, credit spreads are tight, and household balance sheets remain resilient. Even after the tightening delivered in the previous cycle, the overall stance of financial conditions suggests an economy that is not particularly constrained. When conditions are this supportive, the Fed has little incentive to add stimulus, especially with memories of the most recent inflation cycle still fresh. Waiting becomes the safer strategy, not the riskier one.

At the same time, linguistic analysis of recent Fed messaging points to a tone that is drifting slowly toward the hawkish side of the spectrum. Natural language processing techniques that track changes in sentiment and emphasis across speeches and minutes reveal a central bank that is becoming more attentive to upside risks, more focused on inflation persistence, and more cautious about promising too much too early.

The shift is subtle but meaningful. Even if the official rhetoric remains balanced, the underlying language suggests a leadership that wants to keep its options open and avoid locking itself into an easing path that could undermine the progress made on inflation.

Finally, the most important part of this debate concerns the apparent tension at the heart of the Fed’s dual mandate : inflation versus the labour market. Many investors and commentators argue that signs of labour - market softness imply the Fed is already late and should accelerate rate cuts. But the demographic reality tells a different story.

According to the latest U.S. Census Bureau data and projections, working age population growth is expected to turn negative this year, largely because of immigration policy. Over the longer horizon, the trend is structurally much weaker than in previous decades. In practical terms, this means the noninflationary pace of job creation is significantly lower than it used to be. A slower pace of hiring is therefore not an automatic signal that policy is too tight. In fact, our estimates suggest that the U.S. economy can currently generate only 20 ,000 to 50 ,000 jobs a month without creating inflationary pressure.

Taken together, these elements paint a picture of a Fed that is unlikely to see 2026 as an obvious cutting year unless the data move decisively in that direction.

Will productivity growth save the day?

Beyond politics, the arguments championed by Warsh to justify cutting rates are rooted in the supply side of the economy. The incoming Chair sees early signs that the spread of digitalization and artificial intelligence may be lifting the economy’s productive capacity.

This line of thinking argues that disinflation has persisted even as activity remains firm, labour markets have cooled without weakening, and firms are reporting stronger output per hour alongside rising investment in technology.

Warsh interprets these developments as evidence that the economy can operate at a higher level of activity without reigniting inflation.

If he is right, the Federal Reserve should feel comfortable lowering rates as long as inflation continues to drift toward target, even if headline growth remains resilient.

This argument has merit, and there is no doubt that productivity growth in the United States has been stellar, well above other advanced economies. But the cyclical picture described above cannot be overlooked, and Warsh’s colleagues are unlikely to take a leap of faith that an AI- driven productivity boom is imminent, making worries about inflation redundant. Moreover, the investments needed to finance this AI boom could be inflationary.

In short, even though a Warsh - led Fed is likely to cut rates somewhat, it will be no slam dunk. The new Chair will need to convince his colleagues of the merits of his arguments, and the data will need to cooperate.

The path ahead for the policy rate is not the only way that Warsh will affect markets. His appointment will lead to a broader discussion about forward guidance, quantitative easing, and the Fed’s evolving philosophy. In a world where policymakers already feel they have limited room to manoeuvre, the temptation to simplify the toolkit and reduce commitments becomes much stronger. 

Forward guidance, QE, and the return of price discovery

The tools that shaped the postcrisis landscape might not all be relevant today.

Forward guidance and quantitative easing were the pillars of the unconventional policy era. They helped stabilize markets when rates hit zero, but they also reshaped the way investors interpret information. A Warsh - led Fed might be less reliant on those tools, given the clear position he has advocated since leaving the Fed 15 years ago. What will it mean for the long end of the curve and for the way risk is priced?

Forward guidance was introduced as a workaround when the policy rate could no longer fall. By committing to keep rates low for an extended period, the Fed found a way to move long-term yields using only its voice. Households borrowed with more confidence, firms invested, and markets priced in a narrow distribution of outcomes. The benefits were clear in the moment. But the cost was the erosion of flexibility.

Warsh’s argument that the very existence of forward guidance pushes investors to focus on the base case while overlooking the risks carries genuine weight. Episodes such as the taper tantrum of 2013 reminded everyone that forward guidance works until it doesn’t, and then the adjustment becomes abrupt.

It’s also useful to look at the track record of forward guidance through the lens of the Fed’s dot plot. This tool, meant to provide investors with a sense of where FOMC members think policy is heading, has proven to be a poor predictor of actual decisions during most of its existence, particularly since the exit from zero interest rate policy in December.

Quantitative easing complemented this verbal strategy by removing duration from the market and flattening curves through large -scale asset purchases.

It supported market functioning in crises and helped ensure that easy policy reached the real economy. Yet the cumulative effect of a decade of balance sheet expansion was a suppression of term premiums and an environment where safe assets and risk assets both benefitted from the same liquidity tide. It was successful in stabilizing the system, but it raised questions about market depth, leverage, and the gradual blurring of monetary and fiscal boundaries.

A Fed that chooses to rely less on these extraordinary tools would not quite be stepping back from its responsibilities ; rather, it would be attempting to restore the natural channels through which longer - term interest rates respond to economic fundamentals.

If the Fed speaks less about the future path of policy, the long end will revert to being driven primarily by growth expectations, inflation dynamics, fiscal arithmetic, and the ebb and flow of global savings.

Reintroducing uncertainty into the bond market may sound counterintuitive, but it may be the missing ingredient for a healthier system. When markets are forced to infer rather than simply follow guidance, term premiums can rebuild and yield curves can express genuine information about the economy. Such uncertainty would probably translate into higher yields, but it would mostly lead to yields that are more meaningful.

A natural byproduct of this shift would be a normalization of interest rate volatility. The MOVE Index spent most of the postcrisis period below its pre - 2008 range, reflecting a world where the Fed intervened heavily in the bond market. A smaller balance sheet and a more minimalist communication approach could bring rate volatility closer to the regime that prevailed before the Great Financial Crisis.

Warsh has long argued that the Fed should rely less on promises and more on reaction functions that allow outcomes to guide decisions. Under such a philosophy, forward guidance becomes conditional rather than absolute, and QE becomes a crisis tool rather than a permanent feature.

In brief, QE tools were essential at the zero lower bound, but their prolonged use reshaped market behaviour in ways that were not fully anticipated. A gradual retreat from them would mark a return to fundamentals and perhaps a healthier long - term equilibrium for policymakers and investors alike.

But a retreat from QE is not a given. There will be internal and external obstacles. After letting its balance sheet shrink for several years, a process known as quantitative tightening, the Fed recently announced the end of this process, meaning that its balance sheet is expected to stabilize at current levels. If Warsh wants to go back on this decision and resume QT, he is likely to run up against internal opposition at the Fed.

And he will also need to contend with the fiscal reality. The United States continues to run large deficits at a time when the economy is near full capacity, and debt -service costs are rising quickly. Treasury issuance remains heavy, and term premiums have already climbed in response.

A retreat from QE would leave the long part of the curve sensitive to issuance, deficits, and political negotiations, possibly creating tensions with the Treasury Department, which certainly prefers lower long-term rates.

Three scenarios for policy and markets

To summarize the previous sections, if Warsh has his way, the Fed will deliver several rate cuts, while resuming quantitative tightening. The obvious implication is a steepening of the yield curve. But the Fed is a consensus - driven institution, and Warsh will need to convince his colleagues that his views are the right ones. A compromise is more likely, at least in the short term.

This is in fact the impression that the latest FOMC minutes gave us, as we learned that most participants were entertaining the possibility that the next move would be a hike, given stubborn inflation pressures. The swing factor is likely to be the committee’s willingness to extend its hand, and consider the different arguments made by Warsh, or other Trump - aligned governors, such as Chris Waller and Stephen Miran.

Our reading of the minutes suggests that the committee is instead rallying behind its historical framework and is crystallizing its views that stubborn inflation and rate cuts are not compatible, whatever argument about productivity is made.

So what does this mean for investors? Let’s work in scenarios.

Base case: A measured easing cycle (50% odds)

The central scenario remains a gradual easing path, motivated mostly by political pressures. Inflation remains stubborn, labour markets cool without breaking, and the productivity narrative retains enough credibility for the Committee to go along with Warsh’s playbook and deliver one cut.

Balance-sheet runoff resumes gradually in the background. The curve steepens modestly, with the front end responding to policy easing and the long end staying sensitive to issuance and fiscal developments. Intermediate maturities look most appealing from the carry and duration standpoints. Equities remain supported by stable earnings and a benign macro backdrop, although high - duration segments may face occasional volatility tied to long-end moves. Commodities continue to go up, with softer policy helping demand but fiscal dynamics limiting the decline in real yields. The U.S. dollar moves lower as it trades mostly on relative real-rate differentials rather than on surprises from the Fed.

Constructive scenario: The supply side story takes hold (20% odds)

A stronger scenario unfolds if productivity gains show up more clearly in the data and the Fed can cut two or more times in 2026. Output per hour improves, technology - related investment accelerates, and inflation falls without requiring weaker growth. This scenario gives Warsh the analytical foundation to consolidate his framework and win broader Committee alignment. Markets respond positively to a combination of lighter forward guidance, a smaller balance sheet footprint, and a more flexible interpretation of incoming data. Long - term yields drift lower as real yields compress. The U.S. dollar softens gradually. Equities benefit from a sweet spot of rising earnings potential and lower discount rates, with cyclicals leading. Commodities perform even better, supported by firmer activity and healthier supply chains. But, more importantly, the Fed remains perceived as stable and credible.

Difficult scenario: Internal resistance and policy hesitation (30% odds)

A more challenging scenario emerges if the Committee hesitates to follow Warsh’s interpretation of the data, and the Fed’s independence is questioned. Members may remain skeptical of the productivity story or wary of shifting communication and balance sheet doctrine too quickly.

As a result, the Fed stays on hold (at best) or hikes once (at worst), as inflation risks dominate the picture. Political pressure increases as the White House grows frustrated with what it sees as an unnecessarily restrictive stance. Markets worry about the loss of Fed independence, and the term premium rises. Long - term yields become volatile and move higher as investors fear the Fed is operating without a coherent centre of gravity. Equities struggle under higher real yields and wider credit spreads, especially in economically sensitive sectors.

Commodities face a mixed environment, supported by activity but weighed down by tighter financial conditions. This scenario stands in sharp contrast to the market - friendly posture that dominated much of the postcrisis era.

Conclusion

Warsh’s imminent arrival signals a transition toward a Federal Reserve that places greater weight on supply -side forces, relies less on detailed forward guidance, and seeks a smaller balance sheet without disrupting market functioning. Policy rates and the central bank’s footprint are both likely to move lower, but the pace will depend on how quickly the Committee aligns with the new framework and on how fiscal dynamics influence long - term yields.

Markets will need to adapt to a setting where uncertainty is acknowledged rather than compressed and where potential rate cuts could coexist with a continued runoff of the portfolio. This architecture introduces a wider distribution of outcomes, yet it offers a clearer separation between monetary policy and fiscal pressures.

What matters for investors is that a dual descent is likely to begin. Warsh will look to bring policy down from its restrictive stance while gradually bringing its balance sheet down toward a more neutral scale. How orderly this process becomes will depend on Committee cohesion, the credibility of the productivity narrative, and the behaviour of term premiums.

Warsh has long been in the fold for the top job at the Fed. Now the time has come to see whether his new bandmates are ready to play his kind of rock'n'roll.

Positioning

Our overall positioning has been broadly stable since the start of the year. We remain overweight equities with a preference for Asia, emerging markets, and the United Kingdom. These regions stand to benefit most from an improving global growth impulse and a supportive backdrop created by firmer commodity prices. Relative valuations outside the United States remain compelling. and we continue to expect a broadening of market leadership as global growth firms and the reflation narrative gains traction. It is also notable that investors have started to embrace the international diversification theme we have highlighted for some time, with marginal investments increasingly directed toward non - U.S. markets, a trend we think has room to run.

Our position in government bonds is neutral to slightly underweight. Valuations have become more attractive, curves have steepened, and the prospect of policy easing in select markets, most importantly the United States, has improved forward returns. These positives are counterbalanced by the risk that firmer growth, stubborn inflation dynamics, and sustained fiscal looseness keep term premia elevated and cap the upside for long duration. We remain open - minded about the evolution of the duration picture as data unfold, but for now we prefer to express our macro views through equities rather than adding material interest rate exposure.

We maintain a constructive view on commodities with an emphasis on base metals. Demand for hard assets is broadening beyond gold into industrial metals such as copper, as investors search for diversification in an environment where policy signals remain uncertain. This context can support prices and contribute to more pronounced swings.

The base metals complex continues to reflect both cyclical forces and longer - lived structural drivers. Copper has been buoyed by investor inflows along with tariff and stockpiling dynamics that introduce scarcity premia even if the path remains uneven. We remain convinced that the global economy is in a commodity supercycle and we therefore want to maintain exposure to this asset class.