Feigning actions in one direction while secretly making moves in another, is Walsh paving the way for a September "rate cut"?

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Original Author: Zhao Ying

Original Source: Wall Street Insights

The hawkish stance of Federal Reserve Chairman Kevin Warsh may just be a carefully orchestrated smokescreen.

Academy Securities analyst Peter Tchir stated in his latest report that although the market has already priced in a 75% probability of a rate hike in September and expects a cumulative 1.25 rate hikes by year-end, he believes the market is missing a real path to a rate cut in September—and that path may be quietly paved by Warsh himself.

Tchir pointed out that the signals Warsh has sent are clear enough: suppressing the tail risk of long-term yields through hawkish rhetoric (the 10-year Treasury yield has fallen from 4.46% to 4.37% this week), while leaving room for a subsequent shift in the data narrative. In his view, the endgame of this series of moves could be a rate cut in September, followed by another in October, just in time before the midterm elections.

This judgment is still a personal opinion, and Tchir himself acknowledges the uncertainty. But his argument is logically interconnected, covering the redefinition of inflation data, the battle over the neutral rate narrative, and the core premise that the White House's policy objectives have never changed.

Hawkishness Just an Act? Political Logic Points to Rate Cuts

Tchir's argument starts with a political economy interpretation of Warsh's motives.

He believes that the policy goals of the Trump administration have never fundamentally shifted. The president himself has repeatedly stated that he understands real estate well and knows the importance of low interest rates for the housing market. Against this backdrop, it is hard to imagine Trump being satisfied with a persistently hawkish Fed chairman he personally nominated—unless this is a pre-negotiated strategy.

Tchir paints a hypothetical scenario: Warsh convinces Trump that sending dovish signals now would be disastrous. By adopting a hawkish stance, he can suppress long-term yields, maintain the appearance of Fed independence, and push Wall Street analysts and media to fully price in rate hikes. Later, as data gradually "cooperates," he can pivot to rate cuts under the guise of being "data-driven," while blaming the previous Fed for "using wrong data and acting too late."

He adds that Warsh's father-in-law is a major donor to Trump, a background that may not be irrelevant.

Taking Aim at Inflation Data: PCE Is Not This Fed's Yardstick

The most substantive part of Tchir's argument is his systematic critique of the current inflation measurement system.

He clearly states that PCE is not the preferred inflation indicator for Warsh's Fed. He believes PCE was more of a preference from the Bernanke era, and Warsh will not lose sleep over PCE data late at night.

His criticism is particularly sharp regarding the measurement of housing inflation. The "Owners' Equivalent Rent" (OER) in CPI did not peak until mid-2023, with a high of about 8%; while Zillow's rental data had already hit nearly 16% in early 2022. He points out that the Cleveland Fed has developed the "New Tenant Repeat Rent Index" (NTRR), which closely tracks Zillow's trend, but this more realistic indicator has received almost no attention.

His conclusion is that the Fed could switch to using the Cleveland Fed's own indicator without introducing external data, thereby providing a data-based justification for rate cuts.

Truflation and "Two-Point-Something Is Enough"

Beyond PCE, Tchir also cites real-time inflation data from Truflation. According to him, Truflation constructs a daily inflation index based on massive real-time datasets, and its core inflation rate is currently around 1.45%, staying below 1.8% since February this year.

He also notes that Warsh recently hinted that the "big digit" (i.e., the integer part) of the inflation number is more important than the precise value. Tchir infers from this that the market may be gradually being "conditioned" to accept that "two-point-something" is equivalent to being close to the 2% target. In his charts, he marks the inflation target line at 2.9%, rather than the traditional 2%.

He believes that once the data narrative shift is complete, the technical barriers to rate cuts will be significantly reduced.

Tchir also mentions the work of former Fed insider Miran on the neutral rate. He believes that although no one in the market is discussing the neutral rate now, this topic will resurface at the appropriate time.

His logic is that the neutral rate itself is difficult to measure precisely, with a considerable estimation range. If the new Fed leadership can argue that the previous leadership's estimate of the neutral rate was too high, that alone could provide a theoretical basis for 50 to 100 basis points of rate cuts, while shifting the blame to the "old Fed's mistakes."

Apple's Price Hike and AI Inflation: Rate Hikes Aim at the Wrong Target

Addressing market concerns about AI-driven inflation, Tchir offers a contrarian interpretation.

He points out that Apple's (AAPL) recent price hike led to a decline in its stock price. The market's reaction precisely shows that consumers' ability to absorb price increases is being questioned. If even a top consumer goods company like Apple struggles to pass on price hikes to the market, ordinary consumer goods companies will have even less pricing power—contradicting the narrative of sustained inflation.

He also cites feedback from a chip company: memory prices have not surged significantly due to AI demand, and some products are even cheaper than five years ago. He argues that while AI and data center construction spending is indeed inflationary, this is a completely different dimension from the affordability issues faced by ordinary consumers.

More importantly, he believes that rate hikes have almost no dampening effect on AI/data center spending—tech companies trading at 100x valuations are hardly sensitive to a 50-basis-point rate change. Those truly hurt by rate hikes are ordinary borrowers who have nothing to do with AI inflation.

Based on the above analysis, he believes the market will begin to reprice rate cut expectations, with the most certain opportunity at the short end of the yield curve—going long on short-term Treasuries, betting on a decline in front-end yields. For the long end, he maintains a neutral to slightly bullish stance, believing that Treasury Secretary Bessent wants the 10-year yield back to the "3-handle," and Warsh has already eliminated tail risks on the long end through hawkish rhetoric.

On the equity side, he recommends a significant overweight in the energy sector, especially global nuclear power assets; within the defense and security (ProSec) theme, overweight biotech/pharma and underweight chips. He remains cautious on AI and data center valuations and warns that potential secondary offerings by large tech companies could weigh on stock prices.