New Fed Chair Kevin Warsh’s Policy Debut: No Rate Cut, Higher Inflation Outlook

Last week, the Federal Reserve's new 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 (for further reading, see “The Night Before Walsh’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 approximately one hundred words, significantly shorter than at previous meetings. Language previously used to describe the balance of risks, future policy adjustments, and data dependence was directly removed, along with 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Wash also explicitly stated at the press conference that the new statement is “shorter, simpler, and removes some outdated language.” Given his firsthand experience with the most severe phases of the 2008 financial crisis, he believes the current environment is changing too rapidly for the Fed to make premature commitments about future actions; 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 attempting 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. After leaving the Fed, he long criticized excessive expansion of the central bank’s balance sheet, overuse of forward guidance, and excessive monetary policy intervention in financial markets.

Therefore, 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: “Central banks should clearly state their goals but need not pre-announce every operational step to the market.”

This approach was fully reflected in his first FOMC meeting.

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 large 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 in direction. Of the 18 participants who submitted forecasts, nine expected at least one rate hike by the end of 2026, eight anticipated rates to remain unchanged, and only one predicted a rate cut.

Notably, of the nine officials expecting rate hikes, three anticipate one hike, five expect two hikes, and one forecasts three hikes. The median policy rate projection for year-end has also 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, yet inflation is strong enough to rule out further discussions on rate cuts—this is why the market’s 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 his predecessor. However, during the hearing, Walsh clearly stated that the president had never asked him to commit to any interest rate decisions in advance, and he would not accept such a request even if it were made.

At this point, Walsh does not seem eager to prove whether he is a hawk or a dove; rather, his primary goal is to demonstrate that the Fed still has the ability to say no to inflation.

Objectively speaking, the first challenge Wash faced was still inflation.

In April, the U.S. overall PCE increased by 3.8% year-over-year, and 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 re-anchored 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, confusedly writing: “With such a strong jobs report, stocks should go up, not down. That’s always been the case in the last 200 years.”

This precisely reveals the most contradictory aspect of the current market: Wash inherited an economy that is not like the one during the pandemic—weak, barely clinging to life, and requiring unlimited quantitative easing to survive—but rather one that, like in 1994, appears robust on the surface yet carries hidden stagflation risks and could easily lose momentum due to a single monetary policy misstep.

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 Wash is not truly facing a simple either/or choice between raising or lowering rates, but rather a precise calibration of policy timing.

Notably, in April 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, rifts within the Fed have been steadily growing: dovish members argue that the labor market has cooled and that interest rate cuts should be initiated promptly to prevent a hard economic landing, while hawkish members maintain that inflation has not yet been fully tamed and that cutting rates now would undermine progress.

The unexpected 50-basis-point rate cut in September 2024 sparked intense internal debate, with then-board member Michelle Bowman casting the dissenting vote—the first time in nearly two decades that a Fed governor publicly opposed the chair on a rate decision. Trump’s appointments of new members and pressure on the Fed’s independence have 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—he took on 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 meeting has also become a bellwether for stock markets.

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 tends to be. Following the June FOMC meeting, 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 rise and the market further bets on rate hikes, intermediate-term Treasury yields may remain elevated, putting pressure on IEF.M.

However, this does not mean that U.S. Treasuries have only a one-way downward logic. If employment or consumption data suddenly weaken, raising fears of an economic recession, risk-off capital could quickly flow back into Treasuries. Therefore, what affects U.S. Treasuries is not just whether the Fed will next raise rates, but also how the market assesses growth prospects after any rate hike.

Gold ETFs GLD.M and IAU.M are currently assets with conflicting allocation rationale: while elevated real interest rates theoretically weigh on gold, geopolitical risks in the Middle East and sustained gold purchases by global central banks provide supporting support. Therefore, when these two forces counterbalance each other, gold is better understood as a hedging exposure 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 as gold.

Regarding the impact of high interest rates on the AI infrastructure theme, it must be understood at two levels—it cannot be simplistically stated that “rising interest rates mean the end of AI infrastructure”:

• First, there is valuation pressure: Companies such as LRCX.M and KLAC.M in the semiconductor equipment sector, LITE.M and AAOI.M in the optical communications sector, MU.M and SNDK.M in the storage sector, and VRT.M and GEV.M in the power infrastructure sector, all have valuations based on sustained revenue realization over the coming years. Higher interest rates lead to higher discount rates, which reduce the present value of future cash flows.
• The second layer is capital expenditure risk: Cloud providers’ AI CapEx is the source of water for the entire chain. In a high-interest-rate environment, financing costs have risen—will cloud providers cut their budgets? Currently, Microsoft, Google, and Amazon continue to expand their CapEx; the demand-side logic has not changed due to rate hikes. Moreover, higher interest rates are suppressing valuations, not reducing order volumes. As long as cloud providers do not reduce their CapEx, the industrial thesis for AI infrastructure remains valid—only the potential for valuation expansion has been constrained. This conclusion is supported by Google’s performance in Q1 2026.

The defense sector also possesses certain defensive characteristics.

Companies such as LMT.M, NOC.M, and RTX.M generate most of their revenue from long-term government contracts, 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 impacts. Rising yields may still suppress their valuations; the real support comes from policy certainty around 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 no longer prepared to chart 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 full-month employment report under Waugh’s tenure and the most critical labor market signal he will receive ahead of 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 path will loosen again, creating room for a re-pricing of rate cut logic.

Therefore, this data will likely directly set the tone for 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 substantial 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 meeting on July 28–29, which may be Walsh’s first true interest rate decision. With the accumulation of non-farm payroll and CPI data by July, he will need to make a genuine policy choice, allowing the market to form a clearer judgment of him and a more complete outline of the direction.

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 fade, and Walsh’s statement during the hearing, “I won’t agree,” will be repeatedly tested with each 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.