Market Pulse

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Market Pulse

Paulson leans to the "dovish" side of the Fed's policy spectrum. So hearing what amounts to a neutral policy bias from

her is signaling that the more mainstream and hawkish panelists on the FOMC (such as the Board's Jay Powell and Michael

Barr, Cleveland's Elizabeth Hammack, and Dallas' Lorie Logan may have already shifted to a tightening bias, although they

may not yet command the majority on June 17. The problem for the 'hawks' may not be convincing the legacy 'does' to go

along. Rather, the resistance may come from newly-installed Chair Kevin Warsh. Still, we see it as a good sign that President

Trump recently said that he would let Warsh "do what he wants to do," and called Warsh a "very talented guy" who will "do a

good job" - see here. Trump seemed to signal a willingness to give Warsh "operational slack" — a contrast from the heavy

pressure campaigns he previously directed at the Fed when it was under Jay Powell.

The result of Paulson's remarks and Trump's "operational slack" (all coming in the context of the evident spike in inflation) in the

US is that there has been a small drop in the 10-year UST yield today. But we think that to ensure further stability in long-term

yields, other Fed officials will need to follow through in the next few weeks with a hawkish tone, too. Moreover, depending

on what happens to crude oil prices and the US-Iran conflict in the next few days, we believe that the Fed would need to adopt

a tightening bias in June to further avert long-term bond yields rising. The Fed must assume the flexibility it needs to raise the

policy rate target sooner than the market anticipates if it is to convince traders that it wishes to control inflation expectations,