FED CHAIR WARSH SAYS THE FED’S MEASURES OF THE SIZE OF THE AGGREGATE DEMAND CURVE ARE IMPERFECT, BUT THAT THE ECONOMY IS STRONG AND POINTING IN THE RIGHT DIRECTION

Fed Chair Warsh stated that the Federal Reserve's measures of aggregate demand are imperfect, while asserting that the economy is strong and moving in the right direction. The remarks signal a central bank that acknowledges uncertainty in its own gauges of demand while maintaining a constructive read on growth, a combination that complicates the policy reaction function. The transmission channel runs through inflation expectations and the rate path: if demand is stronger than the Fed's models capture, the risk is that disinflation stalls, pushing out expected rate cuts and steepening the front end of the Treasury curve. Rate-sensitive assets such as long-duration Treasuries, rate-sensitive equities, and the dollar would be most exposed to a repricing of the policy path, with real yields serving as the primary transmission mechanism. Traders should watch the next core PCE inflation release and subsequent jobless claims data, as these will indicate whether the Fed's stated confidence in economic momentum is reflected in price pressures.

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