02.07.202607:22 Forex Analysis & Reviews: The Dollar Declined After the First Detailed Speech by the New Fed Chairman Kevin Warsh

The dollar declined after the first detailed speech by the new Federal Reserve Chairman Kevin Warsh. Although the central bank, through him, set a distinctly hawkish tone, he simultaneously indicated that he intends to radically change the usual manner of communicating with the markets. Warsh stated that the Fed will "chart a new course" to make better-informed decisions and that he dedicated the first four weeks to monetary policy. The main message of the speech was that the fight for price stability is still something the central bank has yet to establish.

The stance on inflation was firm. Warsh stated directly that rising prices are clearly above the target level and that prices "remain too high." "If anyone thought that we would be satisfied with inflation above 2 percent, they will be disappointed," he emphasized, leaving no room for dovish interpretations. It is worth noting that he also pointed to some encouraging signals: inflation expectations decreased in the first four weeks, and the risks of accelerating price growth diminished, which pressured the U.S. dollar against risk assets. According to him, the tactics and strategy for combating inflation are yet to be developed, and the most crucial thing the Fed can do is to structure its monetary policy correctly.

Warsh separately highlighted the break from the previous communication practices. He called forward guidance an inappropriate policy under current conditions, adding that the Fed will not provide the market with direct signals or recommendations. He noted that the famous "dots," the forecasts of Fed members regarding interest rates, would only remain for a short time. "If outdated working models hinder the implementation of proper policy, we must get rid of them," Warsh stated, implying that the market will have to unlearn the habit of reading the central bank's intentions based on published benchmarks.

Equally revealing was his stance on the Fed's balance sheet. Warsh did not hide that he would like to see it smaller and emphasized that his opinion had not changed over the first four weeks. He noted that any policy change regarding the balance sheet will be carefully considered and transparently communicated, and that this policy closely borders on fiscal matters. He wants to maintain the interest rate as the Fed's primary tool, although he remains open to different views on the scale of the balance.

Warsh characterized the labor market as stable, the supply side as resilient, and framed the Fed's task as ensuring both employment and price stability. He reminded that the independence of the Fed is unchanged and promised news next week regarding the leaders of workgroups, where he intends to attract top specialists both domestically and internationally.

For the dollar, Warsh's speech presents a problem: a less stringent rhetoric on inflation and a refusal to adhere to a pre-defined path of easing deprive the market of reasons to continue betting on USD strengthening. At the same time, the refusal of forward guidance makes future decisions less predictable, and the market's reaction to these decisions may be more pronounced.