JPMorgan recently advised investors to adopt a "sell 2-year U.S. Treasury" trading strategy. The bank's strategists pointed out that although the market is widely focused on Kevin Warsh's appointment as head of the Federal Reserve, given the solid economic fundamentals, his room for significant interest rate cuts is quite limited.
JPMorgan strategists emphasized:
Strong economic growth and inflation stickiness will limit the downside potential of front-end interest rates, making it difficult for them to fall significantly from current levels.
The market currently expects the Federal Reserve to cut interest rates by 25 basis points as early as July, and then cut them again before the end of the year. The yield on 2-year US Treasury bonds rose slightly to 3.47% ahead of the release of CPI data.
CPI may be higher than expected.
JPMorgan Chase also predicts that the core CPI may rise to 0.39% month-on-month in January, significantly higher than the market consensus of 0.31%, reflecting the continued effect of price adjustments at the beginning of the year and price pressures.
If the CPI data does indeed exceed expectations, it will further limit the Federal Reserve's room for interest rate cuts, validating JPMorgan Chase's trading logic of "selling 2-year US Treasuries." When the market realizes that the pace of interest rate cuts may be slower than expected, short-term bond prices will face downward pressure (yields will rise).
Einhorn bets in the opposite direction: Washington will cut rates "far more than twice".
However, Wall Street is not entirely bearish on interest rate cuts. David Einhorn, founder of Greenlight Capital, holds the opposite view and has bought SOFR (Secured Overnight Financing Rate) futures, betting that short-term interest rates will continue to fall.
Einhorn recently stated publicly:
By the end of the year, there will be far more than two interest rate cuts. This is one of the best trades in the market right now.
He believes that although Washhurst is seen as a hawk, he will actually be inclined to push for interest rate cuts after taking office. Einhorn points out that Washhurst will argue that "as long as inflation does not soar to 4% to 5%, there is evidence of productivity improvements to support interest rate cuts," and even if the economy is still running hot, it will not prevent him from lowering interest rates.
Who will have the last laugh?
At the heart of this disagreement lies the question: Will Walsh be a "pragmatic dove" or a "restricted hawk"?
JPMorgan Chase believes that regardless of who becomes the Federal Reserve Chairman, economic data will ultimately determine the path of interest rates. Current US economic growth momentum and inflation stickiness simply do not allow for significant interest rate cuts.
Einhorn believes that Walsh's own policy inclinations will outweigh the constraints of the data, and he will find arguments to persuade the Federal Reserve to move toward a more lenient path.
John Watney was formally nominated by Trump as the next Federal Reserve Chairman on January 30th, and is considered one of the biggest variables in the global financial markets in 2026. With the CPI data about to be released, short-term volatility in the US Treasury market is likely to intensify, and the battle between bulls and bears on Wall Street over interest rate cuts is just beginning.
