Key Highlights

• Hawkish dissents surprise, as does Powell’s decision to stay on
• Warsh will need soft power to move a divided Committee
• Treasury raises Q2 borrowing estimate; significant bill issuance expected

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Dissents and Powell’s plans set off fireworks

EXHIBIT #1:  MARKET PRICING SHIFTS HAWKISH SINCE CONFLICT ONSET

_{Source: BNY Markets, Bloomberg}

EXHIBIT #2:  POWELL’S ODDS OF AN EARLY EXIT

_{Source: BNY Markets, Bloomberg, Polymarket}

For a meeting that was supposed to be straightforward and relatively predictable, the April FOMC proved considerably more eventful than expected. Chair Jerome Powell may not be riding off into the sunset just yet, but the real story of the meeting was four dissents, the first time in over 30 years. Three of these – from Beth Hammack (Cleveland), Neel Kashkari (Minneapolis), and Lorie Logan (Dallas) – opposed the “inclusion of an easing bias” in the statement language, a signal that incoming Chair Kevin Warsh will get the “messier meetings” that he asked for in his Senate Banking Committee testimony.

The dissents suggest the new Chair will likely face at least a few obstacles in fulfilling the President’s stated desire for quick rate cuts. We think this is currently a moot point and the market is overweighting the significance of this development. The inflationary implications of the U.S.–Iran conflict and their effect on rates are a known quantity. We did not need these recent dissents to signal that committee bias has shifted to more neutral.

Current market pricing has indeed shifted in a more hawkish direction, with the December 2026 implied rate showing 8bp of hikes, and March 2027 pricing showing about 17bp. Exhibit #1 shows market pricing at three points: the start of the conflict, just before last week’s FOMC, and the Monday following the meeting. We regard this repricing as a reactive move rather than a fundamental change in outlook.

Every Fed chair since Ben Bernanke has had to convince and cajole to build consensus. Warsh will only be able to cut rates if he can do the same or if macro conditions shift materially. Those who believe Powell is staying on to block rate cuts misunderstand both him and Committee dynamics. Powell has proven to be slightly dovish through his tenure and is committed to keeping a low profile. We actually view him as an easier vote for Warsh to win over than the three dissenters.

Further, it’s not inevitable that Powell will remain until his term as Governor formally ends on January 30, 2028. His statements suggest that he would like to leave, and that only the Administration’s investigation is keeping him there. He has stated that he will leave “when [he] thinks it’s appropriate to do so.” It would be surprising to us if this were indeed as late as 2028, even though prediction markets put the odds of his leaving the Fed by year end at roughly 40%. 

Q2 borrowing needs rise at quarterly refunding

EXHIBIT #3: TGA REMAINS HISTORICALLY ELEVATED

_{Source: BNY Markets, U.S. Treasury Department}

The U.S. Treasury published its borrowing estimates for the quarter, increasing its estimate by $79bn from the prior quarter, primarily due to lower projected net cash flow. Excluding a higher-than-assumed cash balance in the Treasury General Account (TGA) at the beginning of the quarter, total borrowing needs are $122bn higher than announced in February. The TGA’s expected level for quarter end remains $900bn, as it was in February. Looking ahead to Q3, Treasury currently expects to borrow $671bn, with a quarter-end TGA level of $950bn. Exhibit #3 shows the TGA has been rising steadily, and at the end of April it was at $969bn.

Increased borrowing needs are no surprise, nor is the elevated TGA target. With the conflict continuing to pressure coupon yields, we expect significant bill issuance. T-bill auction sizes in April were cut back in anticipation of significant revenues to the Treasury via higher tax remittances, which did occur. The TGA is nearly $200bn higher today than it was just before April 15, reflecting these revenues. Auction sizes have been increasing again, and we expect this to continue for several weeks.

The question is whether increased supply will impact money markets. We have long argued that Treasury’s heavy T-bill issuance policy creates pressure in funding markets by drawing down reserves and tightening liquidity. Recent money market activity has been largely free of stress, including during tax week (see here) as well as month end. With reserve management purchases (RMPs) having been scaled back from $40bn per month since December to just $25bn in April, the Fed appears comfortable with the current state of liquidity, with reserves comfortably ample.

Rates outlook

We maintain our outlook of two cuts in Q4 – contingent on the Strait of Hormuz reopening and oil prices beginning to recede, taking inflation fears lower with them. We view the labor market as a key risk. Even though the U.S. macro data last month were rather upbeat, we see the risk that pressure from the oil price shock will eventually weaken demand and activity. We acknowledge the risks to this view with limited conviction, as the entire outlook hinges on the reopening of the Strait. This uncertainty was behind the three hawkish dissents last week – we agree that risks are indeed two-way, and prolonged disruption to crude and other commodity transport make the case for eventual cuts difficult to accept.

Nevertheless, we maintain that the Fed is a central bank that would like to ease if there were no conflict pushing up price pressures – if and when the disruptions is resolved, we expect to see meaningful dovish repricing. In the short term, this week’s labor data will provide crucial insight into how employment is holding up a month into the shock.

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