Wall Street veterans brought a "heart-warming pill" to the market: preparing to welcome a significant interest rate cut under the leadership of Powell at the Fed.

In the latest interview, Steven Major, a Wall Street veteran with extensive experience in the financial industry and global macro strategic advisor from the well-known brokerage Tradition Dubai, said that the market's sell-off reaction to the hawkish stance of Kevin Warsh potentially becoming the chairman of the Federal Reserve was overly exaggerated, and the market misjudged the actual monetary policy stance of this new Federal Reserve chairman. The "Wall Street veteran" emphasized that it is expected that the Federal Reserve led by Kevin Warsh may cut interest rates far beyond market expectations. Similarly, the Wall Street financial giant Goldman Sachs released a research report almost at the same time, stating that it is a mistake to judge Warsh's policy direction based solely on his hawkish statements during his time as a director at the Federal Reserve. The Goldman Sachs strategist team pointed out in the research report, "In our view, at least expressing a willingness to cut interest rates was a prerequisite for him to get this job." Goldman Sachs emphasized that the market often habitually misreads the initial monetary policy stance of the new Federal Reserve chairman, and there have been significant "market sell-off misreadings" in the first year of the terms of the past several nominees for the next Federal Reserve chairman nominated by the US president. Investors are experiencing another "misjudgment cycle" of the stance of the new Federal Reserve chairman, and it will take time for the market to adapt to the communication style of the new Federal Reserve chairman. Preparing for a substantial interest rate cut by Warsh-led Federal Reserve Major emphasized in the interview that unless Warsh is in the camp of lowering interest rates, he will not be considered for this central bank leadership role, and there may be four to five interest rate cuts, rather than the currently expected two rate cuts. After President Donald Trump announced last week that he would nominate Warsh as the Federal Reserve chairman, the market was somewhat confused about what Warsh's nomination means for the Federal Reserve's benchmark interest rates, and almost all risk assets were sold off, including gold, a safe-haven asset that had been hitting new highs, to price in a "more hawkish next Federal Reserve chairman." Major's above remarks were made in this context, and his latest comments can be seen as a "market calming pill." Warsh, a former Federal Reserve monetary policy decision-maker who previously set the record as the youngest director in Federal Reserve history, has always been concerned about high inflation in the US. However, Trump has been pushing for a larger scale of interest rate cuts, which is why he has repeatedly threatened the Fed's monetary policy independence and pushed the US government to attack current Federal Reserve Chairman Powell. "I think a reasonable assumption is: unless he belongs to the rate-cutting camp, he will not be considered for this role by Trump himself," Major said in an interview with the media on Tuesday. "The market is pricing in two rate cuts, but I expect there may be four to five, not just two." The probability of a second rate cut in 2026 is currently priced at about 80% in the money markets, lower than last week when the market still believed a third rate cut was possible. Meanwhile, Warsh still needs to be confirmed by the Senate, and he is seen as a more hawkish nominee compared to other candidates previously considered by Trump. In terms of the bond market, US Treasury bonds held their ground on Tuesday, with the 2-year yield hovering around 3.58% and the 10-year Treasury yield stable near 4.3%. The bond market seems to unanimously believe that this long-term hawkish candidate will be more hawkish than other candidates and current Chairman Powell, and it is highly likely that he himself will come up with a unique policy combination of "balance sheet contraction + interest rate cuts" that is unfavorable for the liquidity expansion of the stock and bond markets. Expectations of interest rate cuts potentially heating up the US economy and rekindling inflation make investors prefer short-term government bonds over long-term government bonds, pushing the US Treasury yield curve steeper. Major, who was the former global head of fixed-income research at HSBC Holdings Plc and known for his "super-bull" position in bonds globally, said he is not enthusiastic about making steep trades, but he recommends buying short-term US government bond assets directly. Major is highly regarded in the field of global interest rates/bond investments and is an expert in macro strategy and fixed-income investment strategies. "If you are so sure that the front end of the yield curve will continue to decline, and at the same time believe that the curve will steepen, then buy short-term bond market assets directly, choose to go long," Major emphasized. "I'm not sure about making it steep, I think a better trade is to directly go long in the middle of the curve." As shown in the above chart, the US Treasury yield curve is steepening more sharply; if the market environment is dominated by expectations of interest rate cuts, short-term bond performance will most likely be better. Goldman Sachs: Interest rate cuts are a prerequisite for Warsh's nomination, "balance sheet contraction" is difficult to achieve Goldman Sachs stated that it is a mistake to judge Warsh's policy orientation based solely on his previous statements, "willing to cut interest rates is a prerequisite for him to get this job," and the Goldman Sachs strategist team believes that balance sheet contraction is difficult to push forward, and the Federal Reserve's institutional framework has become an established fact. Goldman Sachs' strategist team stated that they do not believe Warsh will push for a substantial reduction in the balance sheet, and the key resistance lies in the wide and strong support within the Federal Reserve and Wall Street commercial banking giants for the current "ample reserves" operating framework. Goldman Sachs stated that if Warsh wants to reduce the balance sheet without raising long-term interest rates, the only realistic path is to relax bank regulations, such as adjusting liquidity coverage ratio rules, to reduce the demand for reserves by banks, but this will take time and require coordination from multiple parties. Goldman Sachs specifically pointed out that the market's initial interpretation of Federal Reserve nominees often differs significantly from the subsequent views. "Every recent predecessor has experienced some prominent 'misleadings' in the first year, as they need time to adapt to being constantly interpreted on every word, and the market needs time to learn a new communication style," Goldman Sachs strategists wrote.