New Fed Chair, Inflation, and Surprising Jobs: How Global Assets Are Being Repriced

The interest rate hasn't changed, but the Fed's policy script, market expectations, and risk asset pricing framework have all shifted.

Written by Mike, Frank, MSX MaiTong

Last week, the new Federal Reserve Chair, Kevin Warsh, delivered his first monetary policy report since taking office.

The Federal Open Market Committee decided to keep the target range for the federal funds rate unchanged at 3.50%–3.75%, with all 12 voting members in agreement and no dissenting votes (see further reading: “On the Eve of Waugh’s Debut: More Important Than Rate Cuts Is How the Fed Reshapes Expectations?”), marking a routine and uneventful “hold.”

At the same time, this policy statement was condensed into three paragraphs of about a hundred words, significantly shorter than at previous meetings, with language previously used to describe risk balancing, future policy adjustments, and data dependence entirely removed—including the market’s long-standing “forward guidance.”

Wash also explicitly stated at the press conference that the new statement is “shorter, simpler, and removes some of the old language,” and given his firsthand experience of the most severe phase of the 2008 financial crisis, he believes the current environment is changing too rapidly for the Fed to make premature commitments about the future; instead, the market should be refocused on economic data itself.

This may also be the true signal conveyed by the June FOMC meeting: under Waugh’s leadership, the Fed is no longer trying to reduce market uncertainty, but is instead preparing to reintroduce a portion of that uncertainty back into the market.

A new communication framework has begun.

For many investors, Wash is still a relatively unfamiliar name.

But he is not new to the Federal Reserve. From 2006 to 2011, Walsh served as a member of the Federal Reserve Board, experiencing the 2008 financial crisis and the subsequent quantitative easing program. Since leaving the Fed, he has long criticized excessive expansion of the central bank’s balance sheet, overuse of forward guidance, and excessive monetary policy intervention in financial markets.

So rather than relying on repeated policy hints to reduce market volatility, Wash places greater trust in price signals and emphasizes monetary discipline; the core idea can be summarized as: “The central bank should clearly state its goals, but need not pre-announce every operational step to the market.”

This approach was fully reflected in his first FOMC.

In addition to eliminating forward guidance, Wash also declined to submit his own interest rate path in this economic forecast, arguing that the current version of the dot plot is easily misunderstood by markets as a policy commitment, when in fact each dot represents only an official’s conditional projection based on information available at the time.

He even described how officials submitting forecasts seemed to use pencils with giant erasers—predictions could be erased and rewritten at any moment when data changed.

However, even though Walsh attempted to downplay the significance of the dot plot, the market still interpreted it as a clear shift. Of the 18 participants who submitted forecasts, 9 expected at least one rate hike by the end of 2026, 8 anticipated rates to remain unchanged, and only 1 predicted a rate cut.

More notably, of the nine individuals expecting rate hikes, three anticipate one hike, five expect two hikes, and one anticipates three hikes; the median policy rate projection for year-end has risen from 3.4% in March to 3.8%, indicating that under the median scenario, the Fed is not expected to cut rates this year but may instead raise rates by 25 basis points.

Meanwhile, the Federal Reserve significantly raised its 2026 PCE inflation forecast from 2.7% in March to 3.6%, and its core PCE forecast from 2.7% to 3.3%.

In other words, the message from the June meeting was not complicated: the economy is not weak enough to require intervention, but inflation is strong enough to rule out further discussions on rate cuts—this is why the much-anticipated “Wash rate cut trade” quickly faded after his debut.

In addition, when Trump nominated Walsh, the market generally speculated that the new chair might be more willing to cut rates than the predecessor; however, during the hearing, Walsh clearly stated that the president never asked him to pre-commit to any interest rate decisions, and he would not accept such a request even if it were made.

It now appears that Walsh is not in a hurry to prove whether he is a hawk or a dove; first and foremost, he wants to demonstrate that the Fed still has the ability to say no to inflation.

Objectively speaking, the first challenge Wash faces is still inflation.

In the United States, overall PCE increased by 3.8% year-over-year in April, while core PCE rose by 3.3%, still significantly above the Federal Reserve’s 2% long-term target.

More complicatedly, current inflation does not stem entirely from a single factor.

On one hand, energy prices and geopolitical developments continue to impact upstream costs; on the other hand, supply chains, tariffs, and service prices are still generating broader传导 pressures. Once energy price increases further spread to transportation, manufacturing, and household consumption, what the Federal Reserve must address will no longer be just a short-term shock, but the risk of rekindled inflation expectations.

Meanwhile, the labor market proved far stronger than previously anticipated. The U.S. employment report for May, released on June 5, showed non-farm payrolls increased by 172,000—approximately twice the market expectation—while the unemployment rate remained steady at 4.3%.

Under normal circumstances, this would be welcome data. But in the current environment, “economic good news” has been interpreted by the market as “monetary policy bad news.” On the day the employment data was released, the Nasdaq Composite Index fell 4.18%, marking its largest single-day drop in over a year. Semiconductors and high-valuation tech stocks were hit hardest, while bond yields rose significantly.

Trump then posted on Truth Social, puzzled: “With such a strong jobs report, stocks should go up, not down. That’s been the case for the last 200 years.”

This precisely reveals the most contradictory aspect of the current market: the economy Wash inherited is not one like during the pandemic, barely clinging to life and in desperate need of central bank support to survive, but rather one resembling 1994—appearing robust on the surface, yet carrying the hidden risks of stagflation, and随时可能因为一次货币政策失误而失速的经济.

Now, raising rates risks crushing the recovery, while lowering them risks a resurgence of inflation—this is precisely his most difficult predicament.

This is why what Wash truly faces is not a simple either-or choice between raising or lowering rates, but a precise calibration of policy timing.

Notably, in April of this year, the Federal Reserve recorded four dissenting votes—the first significant internal dissent since 1992—and this division did not emerge suddenly. Over the past two years, fractures within the Federal Reserve have been steadily growing: dovish members argue that the labor market has cooled and that rate cuts should be initiated promptly to prevent a hard economic landing, while hawkish members maintain that inflation has not yet been truly tamed and that cutting rates now would undermine all progress.

The unexpected 50-basis-point rate cut in September 2024 sparked intense internal debate, with then-理事 Michelle Bowman casting the dissenting vote, becoming the first Fed理事 in nearly two decades to publicly oppose the chair on a rate decision. Trump’s appointments of new members and pressure on the Fed’s independence further accelerated the visible infiltration of political influence into monetary policy discussions.

Thus, Wash inherited a team deeply divided on policy direction; although the chair has now changed hands, the accumulated disagreements have not disappeared—Wash did not just take on a position, but a powder keg ready to explode at any public meeting.

Establishing internal consensus is itself the first challenge Wash faces.

For the market, the hawkish tone of this FOMC also served as a bellwether for the stock market.

First and foremost, the most direct interest rate trade is between the U.S. dollar and U.S. Treasuries.

At the asset level, the logic behind the USD-long ETF UUP.M is relatively straightforward: the higher the market's expectation of policy rates, the more pronounced the interest rate advantage of U.S. assets compared to other currency assets typically becomes. Thus, following the June FOMC, the U.S. dollar index rose by approximately 0.5%, reflecting the market's repricing of potential rate hikes.

The environment facing the intermediate-term U.S. Treasury ETF IEF.M is more complex. It is well known that bond prices move inversely to yields; if inflation forecasts continue to be revised upward and the market further bets on rate hikes, intermediate-term Treasury yields may remain elevated, putting pressure on IEF.M.

But this doesn’t mean U.S. Treasuries are solely on a one-way downward path. If employment or consumption data suddenly weaken, raising fears of a recession, risk-off capital could quickly flow back into Treasuries. Therefore, what affects U.S. Treasuries isn’t just whether the Fed will next raise rates, but also how the market assesses growth prospects after any rate hikes.

Gold equities GLD.M and IAU.M are currently assets with conflicting positioning: while high real interest rates theoretically weigh on gold, geopolitical risks in the Middle East and continued gold accumulation by global central banks provide supporting support. Therefore, when these two forces counterbalance each other, gold is better understood as a hedge rather than an offensive allocation.

Silver ETFs SLV.M and SIVR.M have an additional industrial demand factor compared to gold. The growing demand for power infrastructure and industrial metals driven by AI infrastructure development provides silver with independent demand support beyond its monetary attributes, giving it an extra layer of resilience under the same macroeconomic pressures.

Regarding the impact of high interest rates on the AI infrastructure theme, it should be viewed at two levels—it cannot be simplistically stated that "AI infrastructure is finished because of rate hikes":

• First, there is valuation pressure: semiconductor equipment stocks like LRCX.M and KLAC.M, optical communication stocks like LITE.M and AAOI.M, memory stocks like MU.M and SNDK.M, and power infrastructure stocks like VRT.M and GEV.M—all rely on sustained revenue realization over the coming years. Higher interest rates increase the discount rate, reducing the present value of future cash flows;
• The second layer is capital expenditure risk: AI CapEx from cloud providers is the water source for the entire chain; with higher interest rates, financing costs have risen—will cloud providers cut their budgets? So far, Microsoft, Google, and Amazon continue to expand their CapEx, and the demand-side logic has not changed due to rate hikes. Moreover, higher rates are suppressing valuations, not reducing order volumes. As long as cloud providers’ CapEx does not contract, the industrial logic behind AI infrastructure remains valid—only the potential for valuation expansion has been compressed. We can draw this conclusion by reviewing Google’s performance in Q1 2026.

The defense sector also has certain defensive characteristics.

Companies such as LMT.M, NOC.M, and RTX.M generate most of their revenue from long-term government contracts, typically offering higher visibility into orders and cash flow compared to high-valuation growth stocks. In a high-interest-rate environment where markets favor predictable cash flows, defense assets may enjoy a relative advantage.

However, this does not mean defense stocks are completely immune to interest rate effects. Rising yields may still suppress their valuations; the real support comes from policy certainty regarding defense budgets and long-term orders, not absolute immunity to interest rate risk.

Wash's first FOMC has provided an initial answer: the Fed is not prepared to continue mapping out every step of the policy path for the market; future volatility will be driven more by the data itself.

But this is still just the beginning; over the coming months, several key milestones remain worth ongoing attention from investors.

First is the June non-farm payrolls on July 2. This is the first fully monthly employment report under Waugh’s tenure and the most critical labor market signal he will receive before the July meeting. If employment remains strong, the window for rate cuts will close further, and discussions about rate hikes may shift from expectation to reality; if the data shows a clear weakening, market expectations for monetary policy will loosen again, creating room for a repricing of the rate cut logic.

Therefore, this data will likely directly determine the tone of the July meeting.

Second is the June CPI data in mid-July, the most critical data point between the two FOMC meetings. Wash has already made it clear at the press conference that price stability is the current top priority; if CPI remains stubbornly high, his stance at the July meeting will only become more hawkish. If inflation shows a meaningful decline, market expectations for his next move will diverge. Regardless of the outcome, this data will trigger significant volatility on the day of its release.

Finally, there is the second FOMC on July 28-29, which may be Walsh’s first true interest rate decision. With the accumulated data from the NFP and CPI, he will need to make a genuine policy choice, at which point market assessments of him will become clearer and the overall direction will be more defined.

Of course, the midterm elections in the second half of the year are undoubtedly a longer-term variable; as the elections draw nearer, the tension between the White House and the Federal Reserve is bound to intensify again. Trump’s desire for rate cuts will not disappear, and Walsh’s statement during the hearing, “I won’t agree,” will be repeatedly tested with every rise in political pressure.

The proposition of monetary policy independence will continue to serve as background noise in the market throughout the second half of the year.