Citadel economist on Walsh: The Federal Reserve may not cut interest rates again this year, and the US dollar bear market is on hold.

Nohshad Shah, economist at Citadel Securities, stated in his latest column that the Federal Reserve may keep interest rates unchanged for the foreseeable future, and this prospect has become clearer following the nomination of Waller as the next Fed Chair. In the context of a resilient U.S. economy and resurfacing inflation risks, the dollar, which has slumped sharply over the past year, may finally catch a breath.

Nohshad Shah pointed out that, under an almost unprecedented combination of loose financial conditions, relaxed monetary policy, and the imminent large-scale fiscal stimulus (OBBA Act), the U.S. nominal GDP this year may range between 5-6%. The Dallas Fed tracks Q4 GDP growth at 2.49%, and the New York Fed’s real-time forecast is 2.74%—all achieved even as the government has experienced prolonged shutdowns.

At last week’s meeting, the Fed acknowledged the reality of stronger economic growth and said that the balance of risks has shifted away from the employment goal. The FOMC statement upgraded the pace of economic activity from "moderate" in December to "robust" expansion, while unemployment showed "stable signs." Signals sent by Chair Powell at the press conference indicated that the committee generally thinks the policy rate is no longer in restrictive territory; after last year’s 75-basis-point "insurance cut," rates are now close to most institutions’ estimate of the neutral rate (about 3.25%).

The dollar has fallen about 11% over the past year—a considerable decline. However, Shah believes that as the Fed may remain on hold in the coming months, the U.S. growth outlook is widely acknowledged, and Fed independence has been reaffirmed, "Dollar bears should exercise caution at current valuation levels."

Reasons for Fed to Stay Put: Strong Economy & Inflation Concerns

Nohshad Shah emphasized in his report that downside employment risks have improved more than upside inflation risks. While there are still concerns in the labor market, consumption and business investment are strong, and corporate profits remain robust.

The U.S. economy has once again demonstrated resilience, rebounding strongly from last year’s tariff shocks. Under the current policy mix, inflation risks may re-emerge as a focal point in the coming months. Shah made it clear: "I do not expect further rate cuts—certainly not from the Fed under Powell’s leadership—perhaps not for the whole year."

Powell reiterated concern over Fed independence in the press conference, and his strategy in dealing with pressure from the Trump administration appears to have worked well. Regional Fed presidents were reappointed early, direct strong responses to DOJ subpoenas were made, and Senator Tillis immediately pushed back—stating he would block the confirmation of new Fed governors until issues were resolved—all indicating that the government’s tactics may be backfiring, failing to achieve greater control over the Fed and push for more dovish monetary policy.

Will Waller Start a Hawkish Era?

Waller’s nomination as the next Fed Chair is at least partly a result of the above political dynamics. Waller is widely seen as a more "establishment" candidate, popular with traditional Republican lawmakers, which should make the confirmation process smoother.

But in terms of policy stance, Waller’s record shows he is "clearly more hawkish" than other contenders, and has always prioritized controlling inflation over employment considerations. Nohshad Shah noted that Waller has little tolerance for using unconventional tools like quantitative easing to expand monetary easing. Under his leadership, rate cuts would likely only happen if current conditions clearly warrant it, and balance sheet reduction would continue.

Waller has criticized what he perceives as "mission creep" during Powell’s tenure, tending to focus more stringently on price stability rather than the broader mandates the Fed has increasingly assumed in recent years—a view echoing Treasury Secretary Bessent’s criticism of the Fed’s "function acquisition."

Although Waller clearly supports Fed independence, past remarks show he is open to closer coordination with the Treasury and political institutions on broader economic strategy. More recently, Waller has supported AI-driven productivity gains and has used this as an argument in favor of lowering rates.

Nevertheless, the Fed’s institutional structure means that staff, governors, and regional presidents all need to reach agreement on any new balance sheet or policy rate paths. Given President Trump’s well-known preference for lower interest rates, Waller may face the challenge of walking a tightrope between his historical policy instincts and political pressure to loosen policy.

Should Dollar Bears Pull Back?

Weakness in the dollar has dominated markets, driven by a series of related factors. Bilateral exchange rate checks by Japan’s Finance Ministry and the New York Fed (acting for the U.S. Treasury) have triggered yen short covering, but also lowered the dollar on a broader basis as markets focus on risks associated with a weak dollar policy and speculation about coordinated dollar depreciation.

Nohshad Shah believes that the reality is more likely that Treasury Secretary Bessent is simply willing to support Japan’s Finance Ministry’s intervention threats to strengthen efforts to contain the yen’s rapid depreciation, rather than signaling a change in U.S. dollar policy. Nevertheless, President Trump’s comments in response to specific questions about the dollar’s position suggest he is satisfied with currency valuations, which further contributed to dollar weakness.

The broad dollar index (DXY) has dropped about 11% over the past year—a significant move. Shah pointed out that this round of renewed weakness has provided a good profit-taking opportunity for investors with long-term short-dollar positions.

"With the Fed likely to remain on hold for at least the next few months, strong U.S. economic growth prospects widely accepted, and Fed independence reaffirmed, dollar bears should exercise caution at current valuation levels," Shah concluded. For investors who view central bank independence as key to global financial stability, the Fed’s future looks less susceptible to explicit political intervention, which is a positive result.

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