Epic signal! Is the Fed Chair's hawkish stance just a smokescreen? Countdown to September rate cut, retail investors still foolishly shorting?

Market observers have made a disruptive judgment: when Wall Street priced the probability of a September rate hike at 75%, Academy Securities analyst Tchir said everyone had been fooled.

Warsh's hawkish stance may be a carefully designed smokescreen. In his latest report, Tchir laid out a clear logical chain: by suppressing the tail risk of long-end interest rates—the 10-year Treasury yield has fallen from 4.46% to 4.37% this week—room is reserved for a subsequent shift in data narrative. The end goal of this series of moves is a rate cut in September, another in October, landing just before the midterm elections.

Tchir acknowledges uncertainty, but his argument is tightly connected. The starting point is a political economy interpretation of Warsh's behavioral motives: the policy goals of the Trump administration have never changed—the president himself has repeatedly stated he deeply understands real estate and knows the importance of low interest rates. It's hard to imagine Trump being satisfied with a sustained hawkish posture from the Fed chair he personally nominated, unless this is a pre-agreed strategy.

Tchir describes a hypothetical scenario: Warsh convinces Trump that sending dovish signals now would be disastrous. Let him appear hawkish, which can suppress long-end yields, maintain the facade of Fed independence, and simultaneously push Wall Street to fully price in rate hike expectations. Then, as data gradually 'cooperates,' pivot to rate cuts under the guise of 'data-driven' policy, and even blame the previous administration for inflation. Warsh's father-in-law is a major Trump donor—this is not irrelevant.

The most substantive part of Tchir's argument is his questioning of the inflation measurement system. He clearly states that PCE is not the preferred indicator of this Fed under Warsh. On housing inflation measurement, the CPI's 'owners' equivalent rent' peaked only in mid-2023 at around 8%; while Zillow's rental data hit nearly 16% as early as early 2022. The Cleveland Fed has already developed a 'new tenant repeat rent index,' which closely matches Zillow but has received little attention. The Fed could easily switch to using its own Cleveland Fed index without introducing external data, thereby providing justification for rate cuts at the data level.

Tchir also cites Truflation's real-time inflation data—a daily inflation index built on massive real-time datasets, with core inflation currently around 1.45% and persistently below 1.8% since February this year. He notes that in recent statements, Warsh hinted that the 'big figure' of inflation numbers is more important than the precise value. The market may be gradually being 'conditioned' to accept that 'two point something' is essentially close to the 2% target. He marks the inflation target line as 2.9% in his chart, rather than the traditional 2%. Once the data narrative completes its shift, the technical obstacles to rate cuts will be significantly lowered.

Tchir also mentions the work of former Fed insider Miran on the neutral rate. Currently, no one in the market discusses the neutral rate, but this topic will surface at the appropriate time. The neutral rate is difficult to measure precisely and has a considerable estimation range. If the new Fed leadership can argue that the previous leadership's judgment on the neutral rate was too high, then this alone can provide a theoretical basis for 50 to 100 basis points of rate cuts, while attributing the blame to 'old Fed mistakes.'

In response to market concerns about AI-driven inflation, Tchir offers a contrary interpretation. Apple's stock price fell after its price increase—market reaction 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 increases, ordinary consumer goods companies will have even less pricing power. He also cites feedback from a chip company: memory prices have not risen significantly due to AI demand, and some products are even cheaper than five years ago. AI and data center construction spending is indeed inflationary, but this is a different dimension from the affordability issue for ordinary consumers. More importantly, rate hikes have almost no restraining effect on AI/data center spending—tech companies trading at 100x valuations are simply not sensitive to a 50bp rate move. Those truly hurt by rate hikes are ordinary borrowers who have nothing to do with AI inflation.

Based on the above judgment, Tchir believes the market will begin to reprice rate cut expectations. The most certain opportunity lies in the short end of the yield curve—go 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 to return to the '3-handle,' and Warsh has already eliminated long-end tail risks through hawkish rhetoric. On equities, he recommends significantly overweighting the energy sector, especially global nuclear power assets; overweighting biotech/pharma under the defense and security theme, and underweighting chips. He is cautious on AI and data center valuations, warning that potential equity dilution pressure from large tech companies could drag down stock prices.

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