"Washington's nomination triggers bond market repricing, traders worry that the Fed's rate cut will boost inflation more than expected."

In the US debt market, with a scale of around $30 trillion, traders are reassessing the next nominee for the chairman of the Federal Reserve nominated by President Trump. On Friday, the trading trends in the US bond market showed that investors still have some concerns about the nomination of former Federal Reserve Governor Kevin Warsh to replace current chairman Powell. Long-term bond yields rose slightly that day, while short-term rates fell slightly, leading to a further steepening of the yield curve. The market is worried that if Warsh is approved by Congress, he may push for more rate cuts than currently expected, thus laying the groundwork for future inflation risks. Will Compernolle, a strategist at FHN Financial in Chicago, said that Warsh's nomination avoided the "worst-case scenario," but its actual impact on rate policy remains unclear. The current signal being sent by the bond market is that the Fed's rate path under Powell's leadership is still seen as the "right way to manage risks." The latest forecasts by Fed officials only predict one 25 basis point rate cut in 2026, while federal funds rate futures traders are generally betting on the possibility of two rate cuts before the end of the year. However, if Warsh leans more towards Trump's preference for low rates, he may push for more rate cuts than expected and accelerate the reduction of the Fed's balance sheet. As a result, the yields on 10-year and 30-year US bonds both rose by less than 2 basis points on Friday, reaching 4.24% and 4.87% respectively. The 30-year yield briefly exceeded 4.9% during the day before retracing. Meanwhile, the 5-year Breakeven Inflation Rate, which reflects market expectations for average inflation over the next five years, remains above 2.5%, signaling increasing concerns about inflation risks. The indicator had dropped to 2.28% earlier this year. Compernolle pointed out that the market had previously been concerned that Trump would choose a nominee who would "disrupt the Fed's system," so Warsh's nomination is still considered "acceptable" by investors. However, the new concern is that Warsh may lean towards looser monetary policy for short-term growth at the expense of long-term inflation stability. Warsh served as a Federal Reserve governor from 2006 to 2011, and left shortly after the launch of the second round of quantitative easing under Bernanke's leadership, making him more inclined to limit the expansion of the Fed's balance sheet. In recent years, he has publicly advocated for lower rates and a smaller Fed balance sheet, and has expressed understanding of Trump's dissatisfaction with the Powell era policies. Economist Derek Tang from Monetary Policy Analytics believes that Warsh's policy stance may continue to evolve in the future, and his past views may not fully represent his actions if he becomes chairman. He emphasized that the Fed chairman is just one member of the FOMC, and Warsh would need to convince other members to support his policy views. However, Tang also pointed out that Warsh may indeed push for more rate cuts than the market expects, "the final number of rate cuts may be one to two more than currently predicted, with a total of four rate cuts throughout the year, depending on the economic and inflation trends."