The Warsh Yield Curve Trap Has Rate Cuts Up Front, Chaos Out Back

Warsh's arrival as Fed chair thrusts markets into a regime implying aggressive rate cuts, yet the Treasury’s ‘closed hydraulic loop’ of liquidity complicates the picture. With 30-year yields at 5.17% and 10-year at 4.65%, the balance sheet and persistent deficits shape a volatile landscape where a front-end steepener is plausible if easing begins, but issuance can blunt the impulse. Analysts note CPI lags GDP and funds rate lags CPI by several quarters, suggesting the curve could steepen as deficits drain liquidity. The dynamic also hints at potential gold strength if the dollar weakens alongside lower yields, creating a complex, multi-factor path for policy transmission.