BofA: Kevin Warsh Primer — Dovish Space Constrained by Inflation

Bank of America examines the potential policy framework under Kevin Warsh if he assumes the role of Federal Reserve Chair, concluding that his recent dovish posture faces severe practical constraints. Warsh has recently advocated for immediate rate cuts, arguing that the Federal Reserve over-tightened policy following the inflation errors of 2021 and 2022. He suggests policymakers should look through one-off price level shifts caused by tariffs and geopolitical disruptions, preferring to emphasize trimmed-mean inflation metrics. However, Bank of America highlights a significantly deteriorated macroeconomic backdrop. The Iranian conflict has triggered an energy price shock, pushing headline PCE toward 4%. Core inflation is similarly resurgent, with the firm estimating April core PCE at 3.3% year-over-year, annualizing above 4% over the trailing five months. Since his nomination, the two-year Treasury yield has risen over 60 basis points, and market pricing for late 2027 shifted from multiple cuts toward a potential rate hike. Bank of America expresses strong skepticism that the Federal Open Market Committee would abandon core PCE for trimmed-mean measures, noting such a pivot could damage institutional credibility by appearing to cherry-pick favorable data amid persistent inflation overshoots. While Warsh favors AI-driven productivity gains and a smaller balance sheet, BofA believes inflation realities, committee consensus, and institutional credibility will severely limit his dovish policy space. Ultimately, the dollar's direction depends on whether he forces rate cuts against inflationary pressure or yields to committee constraints.

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