Warsh Declines Comment on Any Discussion With President Trump

U.S. lawmakers Mike Lawler and Josh Gottheimer said they would not have raised interest rates, citing the burden of elevated rates and inflation on consumers. Donald Trump called for U.S. rates of 1% or less, while White House Council of Economic Advisers Chairman Chris Phelan said inflation is declining by every measure. The discussion highlights political pressure for easier monetary policy, though it contains no new Federal Reserve action or economic data.

Analysis

The investable issue is not the political preference for lower policy rates; it is whether markets begin pricing a diminished Federal Reserve reaction function. A credible perception that future appointments favor prematurely accommodative policy would steepen the long end even if front-end rates fall: 2-year yields decline on expected cuts while 10- and 30-year term premium rises on inflation and fiscal-dominance risk. That configuration is supportive of bank NIM only if deposit betas fall faster than asset yields, but is more reliably negative for long-duration equities whose valuations depend on declining real yields.

Over the next 1-3 months, the key catalyst is not rhetoric but whether inflation-sensitive releases and Treasury auctions force a repricing of terminal inflation expectations. A benign disinflation sequence could make lower-rate expectations broadly risk-on, favoring small caps and housing; a rebound in core services, wages, or inflation expectations would instead produce a bear steepener, pressuring REITs, utilities, and highly levered consumer issuers. The most asymmetric expression is to own curve steepening rather than simply chase duration.

Consensus may underweight the split between nominal-rate beneficiaries and real-rate beneficiaries. Mortgage lenders, regional banks, and homebuilders can benefit from lower short rates and improving credit availability, while unprofitable software and speculative growth may not if the 10-year yield remains elevated. This becomes a 6-18 month structural risk if fiscal deficits and perceived monetary interference raise the equity risk premium; lower administered rates would then fail to deliver the multiple expansion investors expect.

Key Decisions for Investors

• Add a modest 2s10s Treasury steepener for a 1-3 month horizon (long 2-year futures / short 10-year futures, DV01-neutral). Thesis: easing expectations can lower the front end while inflation and term-premium uncertainty cap long-end rallies; reassess if core PCE runs below 0.15% m/m for two consecutive prints and 10-year breakevens fall below recent ranges.
• Pair long KRE against short XLRE over 3-6 months rather than taking broad rate exposure. Regional-bank upside requires easing credit conditions and lower funding costs, while REITs remain vulnerable to refinancing and cap-rate pressure if the curve bear-steepens; exit if bank deposit costs fail to decline in upcoming quarterly disclosures or commercial-real-estate charge-offs accelerate.
• Maintain an underweight in long-duration, cash-flow-negative growth via a hedge in ARKK or a basket of high-multiple software names until real 10-year yields decline materially. The thesis is falsified by sustained falling long-end yields alongside stable inflation expectations, which would restore the valuation-duration trade.
• Watch mortgage-rate spreads and purchase applications before adding homebuilders (ITB/XHB). A durable tightening of the mortgage-Treasury spread, not merely lower policy-rate expectations, is required for incremental volume upside; absent that confirmation, lower short rates may primarily aid existing borrowers rather than new-home demand.