Key Highlights

• A relatively benign funding week breeds confidence in balance sheet management.
• Kevin Warsh’s confirmation hearings occur this week; timing the transition is tough.
• No change to our outlook for two cuts in Q4.

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Tax Day post-mortem: As expected, minimal stress

EXHIBIT #1:  MONEY FUNDS TRANSFER TAX PAYMENTS TO TREASURY

_{Source: BNY Markets, Federal Reserve Board of Governors, Crane Data}

Tax Day has come and gone, and money markets have passed the week relatively unmoved. Repo rates were slightly elevated on April 15, and standing repo was tapped for around $10.5bn in liquidity on the day. Overall, however, it was a relatively uneventful week in the funding markets, much as we had expected.

As Exhibit #1 shows, the Treasury General Account (TGA) swelled by $284bn between April 9 (when it was at a recent low of $687bn) and April 16, when it touched $971bn. Much, though not all, of the increase came from lower money market mutual fund (MMF) balances, which have slipped by $200bn over roughly the same period, as taxpayers transferred cash from their personal holdings to the government. Since 2021, the average decline in MMF holdings during tax week has been $89.6bn, although recent years have seen bigger cash drawdowns via this process. Money funds’ cash holdings climbed toward $2.3tn earlier this year, peaking at $2.28tn in mid-March before easing ahead of last week’s tax deadline.

This dynamic was also observed in the Fed’s most recent H.1.1 table, which itemizes the balance sheet weekly. It indicates that in the week ending April 16, reserves were about $322.5bn lower than the previous week. Again, this is not unexpected; last week we showed the dynamics of the TGA and reserves around Tax Day since the pandemic. This year’s drain in reserves was the second largest decline since 2022.

The money markets’ resilience is a testament to the Fed’s balance sheet policy since last autumn – first curtailing QT in November, then launching reserve management purchases (RMPs) to the tune of $40bn per month from December 12 through April 12. The most recent RMP, covering mid-April to mid-May, was reduced to just $25bn on the eve of Tax Day – a move that surprised us. We read this as a signal that the Fed is confident funding markets are, for the time being, in a good place.

Warsh confirmation hearing Tuesday – timing still an issue

EXHIBIT #2: MARKETS SKEPTICAL ON TIMELY FED TRANSITION

_{Source: BNY Markets, Polymarket, Bloomberg}

On Tuesday, the Senate Banking Committee holds confirmation hearings for Fed Chair nominee Kevin Warsh amid uncertainty over the timing of the Fed’s leadership transition. North Carolina Republican Senator Thom Tillis, who will step down at the end of this year, has stated that he supports Warsh but will not advance any Fed nominations until the Department of Justice’s investigation into the restoration of the Fed’s Washington, DC headquarters is concluded. The president, for his part, has recently indicated he wants to pursue the investigation, setting up an indefinite delay for the confirmation proceedings if Tillis holds to his position.

In his last FOMC press conference, Chair Jerome Powell (whose term leading the FOMC formally expires on May 15) said he would stay on as Chair pro tempore if no successor is named by then. Furthermore, he declared unequivocally that he has “no intention of leaving the Board until the investigation is well and truly over.” He added that he has made no decision on his future thereafter; while his term as Chair ends this May, he technically can remain as a governor until 2028. This would be largely unusual, but admittedly, we’re in somewhat unprecedented times with this Fed transition.

Prediction markets are skeptical that everything will be wrapped up by May 15. Polymarket betting odds, shown in Exhibit #2, indicate a low expectation that Warsh will be confirmed by then and an even lower chance that current Chair Powell will depart from the Board in May.

The hearing will be substantive regardless of the outcome on confirmation and timing. Warsh will be pressed on his views on lower interest rates, the size of the Fed’s balance sheet, and the relationship between the Treasury and the Fed. There will undoubtedly be some discussion of Warsh’s previous tenure on the FOMC, when he was advocating for rate hikes in 2008 in response to the GFC. 

Rates outlook

As we head into the Warsh confirmation hearings and the FOMC’s April 29 meeting, we note very little change to our 2026 rates outlook and still call for two hikes in Q4. Last week’s inflation data, in the form of a benign (relative to expectations) PPI, was encouraging, but we don’t think we’re out of the inflation woods by any means. We expect that as long as the Strait of Hormuz remains blocked – and even for some time thereafter – pressure on input prices, alongside short-term inflation expectations, will keep rate cut discussions off the table.

Our two-cut call (down from three cuts before the war) assumes that hostilities eventually recede and – crucially – crude and other products begin to flow again. The longer the delay, the greater the risk to our rate calls, but we remain confident flows will eventually resume. Short-term inflation expectations – from both surveys and market-implied prices – have risen recently, as expected, while long-term expectations have remained stable. This will allow the Fed to “wait and see” – avoiding rate hikes until things change. We’ll present our full April FOMC preview next week, but we expect very little at next Wednesday’s meeting.

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