Citadel Economist Talks about Wosh: The Federal Reserve May Not Cut Interest Rates in the Next Year, and the U.S. Dollar Bear Market Pauses

Citadel Securities economist Nohshad Shah stated in a recent column that the Federal Reserve may keep interest rates unchanged in the foreseeable future, and with Waller being nominated as the next Fed Chair, this outlook has become clearer. Amid a resilient US economy and rising inflation risks, the US dollar, which has fallen sharply over the past year, may find some relief.

Nohshad Shah pointed out that under an almost unprecedented policy mix of loose financial conditions, easing monetary policy, and the upcoming large-scale fiscal stimulus (OBBA Act), the nominal GDP in the US could be in the 5-6% range this year. The Dallas Fed tracked Q4 GDP growth at 2.49%, while the New York Fed’s real-time forecast was 2.74%, achieved despite a prolonged government shutdown.

At last week’s meeting, the Fed acknowledged stronger economic growth and indicated that the risk balance has shifted from employment goals. The FOMC statement upgraded the description of economic activity from “moderate” in December to “robust” expansion, with unemployment showing “signs of stability.” Chairman Powell’s signals during the press conference suggested that the committee generally believes policy rates are no longer in a restrictive zone. After implementing a 75 basis point “insurance cut” last year, rates are now close to most institutions’ estimates of the neutral rate (around 3.25%).

The dollar has declined about 11% over the past year, a significant drop. However, Shah believes that as the Fed may remain on hold in the coming months, the US economic growth outlook is broadly recognized, and the Fed’s independence is being reaffirmed, “dollar bears should remain cautious at current valuation levels.”

Reasons for the Fed Holding Steady: Strong Economy and Inflation Concerns

Nohshad Shah emphasized in his report that the downside risks to employment have improved more than the upside risks to inflation. Despite some concerns in the labor market, consumer spending and business investment remain strong, and corporate profits are stable.

The US economy has demonstrated resilience once again, rebounding strongly from last year’s tariff shocks. Under the current policy mix, inflation risks could become a focus again in the coming months. Shah explicitly stated: “I do not expect further rate cuts—certainly not from the Fed led by Powell—for perhaps an entire year.”

Powell reiterated concerns about the Fed’s independence during the press conference, and his strategy of resisting pressure from the Trump administration seems to be working well. The early reappointment of regional Fed presidents, strong responses to Department of Justice subpoenas, and Senator Tillis’s immediate counterattack—who said he would block the confirmation of new Fed governors until the issues are resolved—all suggest that government strategies may be counterproductive, failing to exert greater control over the Fed and pushing for more dovish monetary policy.

Will Waller usher in an hawkish era?

Waller’s nomination as the next Fed Chair is at least partly driven by the political dynamics mentioned above. Waller is widely viewed as a more “establishment” candidate and is popular among traditional Republican lawmakers, which should facilitate a smoother confirmation process.

But in terms of policy stance, Waller’s track record shows he is “significantly more hawkish” than other contenders, always prioritizing inflation control over employment considerations. Shah noted that Waller is less tolerant of unconventional tools like quantitative easing to expand monetary easing. Under his leadership, rate cuts are likely only to be implemented when current conditions clearly warrant it, and the balance sheet will continue to shrink.

Waller has criticized what he perceives as “mission creep” during Powell’s tenure, favoring a stricter focus on price stability rather than the broader goals that the Fed has increasingly taken on in recent years, echoing Treasury Secretary Bessent’s criticism of the Fed’s “functionality.”

Although Waller explicitly supports the Fed’s independence, past statements suggest he is open to closer coordination with the Treasury and political institutions on broader economic strategies. Recently, Waller also supported AI-driven productivity gains and used this as an argument to advocate for lower interest rates.

However, the Fed’s institutional structure means staff, governors, and regional presidents need to agree on new balance sheet policies or rate paths before implementation. Given President Trump’s well-known preference for lower policy rates, Waller may face the challenge of balancing his historical policy instincts with political pressures to ease policy.

Should the dollar bears call it a day?

The dollar’s weakness has been a dominant market theme, driven by a series of related factors. Bilateral exchange rate checks by Japan’s Ministry of Finance and the New York Fed (representing the US Treasury) triggered yen short covering, but also broadly pushed down the dollar amid concerns over a weak dollar policy and speculation around coordinated dollar depreciation.

Shah believes that the actual situation is more likely that Treasury Secretary Bessent is simply willing to support Japan’s Ministry of Finance’s intervention threats to enhance their effectiveness in curbing rapid yen depreciation, rather than signaling a shift in dollar policy. Nonetheless, President Trump’s comments in response to specific questions about the dollar suggest he is satisfied with the currency’s valuation, which has contributed to the dollar’s weakness.

The broad US dollar index (DXY) has fallen about 11% over the past year, a considerable volatility. Shah pointed out that this recent weakening provides a good opportunity for long-term dollar short positions to take profits.

“With the Fed likely to remain on hold for at least the next few months, the US economic outlook broadly accepted, and the reaffirmation of the Fed’s independence above, dollar bears should remain cautious at current valuation levels,” Shah summarized. For investors who see central bank independence as key to global financial stability, the future of the Fed appears less susceptible to public political interference, which is a positive sign.

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