New Chair, Old Inflation, and a Stronger-Than-Expected Jobs Report: How Will Global Assets Be Repriced After Warsh’s Debut?

**Authors: Mike, Frank, MSX Maitong** Last week, the new Federal Reserve Chair, Kevin Warsh, delivered his first monetary policy report after taking office. The Federal Open Market Committee decided to maintain the target range for the federal funds rate at 3.50%—3.75% unchanged. All 12 voting members were in favor, with not a single dissenting vote (further reading: *[The Eve of Warsh's Debut: More Important Than a Rate Cut is How the Fed Reshapes Expectations?](../articles/019ed493-a588-767e-bec4-11207a30bbb9)*), marking a rather uneventful "hold." However, at the same time, the policy statement was compressed into three paragraphs, totaling just over a hundred words, significantly shorter than previous meetings. Moreover, language previously used to describe the balance of risks, future policy adjustments, and data dependency was directly removed. Even the "forward guidance" that the market had grown accustomed to over the years disappeared along with it. Warsh explicitly stated at the press conference that the new statement is "shorter, simpler, and removes some of the old language." In his view, having experienced the most brutal phase of the 2008 financial crisis, **the current environment is changing too fast. The Fed should not prematurely commit to what it will do in the future but should instead refocus the market's attention back on the economic data itself.** This may be the real signal sent by the June FOMC meeting: The Fed under Warsh's leadership is no longer trying to reduce uncertainty for the market but is prepared to return some of that uncertainty back to the market. A new communication framework has begun. ### **I. Interest Rates Unchanged, but the Fed's Policy Language Has Changed** For many investors, Warsh remains a relatively unfamiliar name. But he is not a newcomer to the Fed. From 2006 to 2011, Warsh served as a Fed Governor, experiencing the 2008 financial crisis and the subsequent quantitative easing process firsthand. After leaving the Fed, **he long criticized the excessive expansion of central bank balance sheets, the proliferation of forward guidance, and the over-intervention of monetary policy in financial markets.** Therefore, rather than reducing market volatility through successive policy hints, Warsh believes more in price signals and emphasizes monetary discipline. His core philosophy can be summarized as: "The central bank should make its objectives clear, but it does not need to tell the market every step of its operations in advance." This approach was fully reflected in his first FOMC meeting. In addition to eliminating forward guidance, Warsh also refused to submit his own interest rate path in this economic projection. **He believes the current version of the dot plot is easily misinterpreted by the market as a policy commitment, when in reality, each dot is merely a conditional forecast made by an official based on the information available at the time.** He even described officials submitting their forecasts as if they were using "pencils with big erasers"—once the data changes, the forecast can be erased and rewritten at any time. However, even though Warsh tried to downplay the importance of the dot plot, the market still saw a very clear shift in it. Among the 18 participants who submitted forecasts this time, 9 expected at least one rate hike by the end of 2026, 8 expected rates to remain unchanged, and only 1 expected a rate cut. More notably, among the 9 expecting hikes, 3 projected one hike, 5 projected two hikes, and 1 projected three hikes. The median year-end policy rate also rose from 3.4% in the March projection to 3.8%. This means that in the median scenario, the Fed not only will not cut rates this year but may instead hike by 25 basis points. Simultaneously, the Fed sharply raised its 2026 PCE inflation forecast from 2.7% in March to 3.6%, and the core PCE forecast from 2.7% to 3.3%. In other words, the message from the June meeting is not complicated: **The economy is not yet weak enough to need rescue, but inflation is already strong enough that discussing rate cuts can no longer continue.** This is why the "Warsh rate-cut trade" that the market once anticipated quickly faded after his debut. Furthermore, when Trump nominated Warsh, the market widely speculated that the new chair might be more willing to cut rates than his predecessor. However, during his confirmation hearing, Warsh made it clear that the President never asked him to pre-commit to any interest rate decision, and even if such a request were made, he would not accept it. As it appears now, Warsh is not in a hurry to prove whether he is a hawk or a dove. What he wants to prove first is that the Fed still has the ability to say no to inflation. ### **II. What Kind of "Hot Potato" Has Warsh Inherited?** Objectively speaking, the first problem Warsh faces is still inflation. The US overall PCE rose 3.8% year-over-year in April, and core PCE rose 3.3% year-over-year, still a significant distance from the Fed's 2% long-term target. More troubling is that the current inflation does not stem from a single factor. On one hand, energy prices and geopolitical situations continue to affect upstream costs; on the other hand, supply chains, tariffs, and service prices are still generating broader transmission pressures. Once the rise in energy prices further spreads to transportation, manufacturing, and consumer spending, what the Fed needs to deal with is no longer just a short-term shock but the risk of re-emerging inflation expectations. At the same time, the job market is far stronger than the market previously anticipated. The US May employment report released on June 5 showed non-farm payrolls increased by 172,000, roughly double the market expectation; the unemployment rate remained at 4.3%. Under normal circumstances, this would be welcome data. But in the current environment, "good economic news" was translated by the market into "bad monetary policy news." On the day the employment data was released, the Nasdaq Composite Index fell 4.18%, its largest single-day drop in over a year. Semiconductors and high-valuation tech stocks were hit hardest, while bond yields rose markedly. Trump subsequently posted on Truth Social, writing in confusion: "**With such a good jobs report, stocks should be going up, not down. That's how it's been for 200 years.**" This precisely reveals the most contradictory aspect of the current market. What Warsh has inherited is not an economy on its deathbed, desperately needing central bank rescue like during the pandemic era, requiring unlimited easing to survive. Instead, it is an economy like that of 1994—appearing robust on the surface but carrying the hidden danger of stagflation, which could stall at any moment due to a single monetary policy misstep. Now, hiking rates risks crushing the recovery, while cutting rates risks an inflation resurgence. This is precisely his most difficult predicament. This is also why what Warsh truly faces is not a binary choice of "hike or cut" but a matter of precise control over policy timing. It is worth noting that in April this year, the Fed saw four dissenting votes, the first large-scale internal dissent since 1992. This division did not appear suddenly. Over the past two years, rifts within the Fed have been accumulating: doves believe the job market has cooled and rate cuts should begin soon to prevent a hard landing; hawks insist inflation has not truly been tamed and cutting rates would only waste prior efforts. The unexpectedly large 50-basis-point rate cut in September 2024 sparked intense internal controversy. Then-Governor Michelle Bowman cast a dissenting vote, becoming the first Fed Governor in nearly two decades to publicly break ranks with the Chair on a rate decision. Trump's appointment of new members and pressure on the Fed's independence have further allowed this political tint to visibly permeate monetary policy discussions. Therefore, Warsh has inherited a team deeply divided on policy direction. The chair has changed hands, but those accumulated disagreements have not dissipated. Warsh has not just taken over a position but a powder keg that could explode at any public meeting. **How to build internal consensus is itself the first test Warsh faces.** ### **III. How Are Global Assets Being Repriced?** For the market, the hawkish tone of this FOMC meeting also served as a weather vane for the stock market. First, naturally, is the most direct interest rate trade: the US dollar and US Treasuries. In terms of assets, the logic for the US Dollar Bullish ETF UUP.M is relatively straightforward. The higher the market's expectation for the policy rate, the more obvious the interest rate differential advantage of US assets compared to other currency assets usually becomes. Thus, the US dollar index rose about 0.5% after the June FOMC, precisely the result of the market repricing the potential for rate hikes. The environment facing the Intermediate-Term US Treasury ETF IEF.M is more complex. As is well known, bond prices move inversely to yields. If inflation forecasts continue to be revised upwards and the market further bets on rate hikes, intermediate-term Treasury yields may remain high, putting pressure on IEF.M. But this does not mean US Treasuries only have a one-sided downward logic. If employment or consumer data suddenly weakens and recession fears rise, safe-haven funds could quickly flow back into Treasuries. Therefore, what affects US Treasuries is not just whether the Fed hikes next but also how the market judges the growth outlook after a hike. Gold stocks GLD.M and IAU.M are assets with relatively conflicted positioning currently. High real interest rates theoretically suppress gold, but Middle East geopolitical risks and continued buying by global central banks provide another pillar of support. Therefore, when these two forces pull against each other, gold is better understood as a hedging exposure rather than an aggressive allocation. Silver stocks SLV.M and SIVR.M have an additional layer of industrial attribute logic compared to gold. The demand pull from AI infrastructure on power infrastructure and industrial metals gives silver independent demand support beyond its monetary attributes. This provides it with an extra buffer compared to gold under the same macro pressures.

As for the impact of high interest rates on the AI infrastructure theme, it can be broken down into two levels. One cannot simply say "rate hikes mean the end of AI infrastructure": * First 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. The valuations of these companies are built on revenues expected to be realized continuously over the next few years. The higher the interest rate, the higher the discount rate, and the lower the present value of future cash flows. * The second level is capital expenditure risk: Cloud providers' AI CapEx is the water source for the entire chain. In a high-interest-rate environment, financing costs rise. Will cloud providers cut their budgets? Currently, it appears that Microsoft, Google, and Amazon's CapEx is still expanding. The demand-side logic has not changed because of rate hikes. Furthermore, what interest rates suppress is valuation, not the number of orders. **As long as cloud providers' CapEx does not contract, the industrial logic for AI infrastructure remains intact; only the space for valuation expansion has been compressed.** If we were to review Google's performance in Q1 2026, we could draw this conclusion. The defense sector also possesses certain defensive attributes. The revenues of companies like LMT.M, NOC.M, and RTX.M mainly come from long-term government contracts. The visibility of their orders and cash flows is typically higher than that of high-valuation growth stocks. In a phase where interest rates are high and the market prefers certain cash flows, defense assets may gain a relative advantage. However, this does not mean defense stocks are completely unaffected by interest rates. Rising yields can still suppress their valuations. What truly provides support is the policy certainty of defense budgets and long-term orders, not absolute immunity to interest rate risk. ### **IV. Looking Ahead, What Should the Market Really Focus On?** Warsh's first FOMC meeting has already provided a preliminary answer: **The Fed is not prepared to continue planning 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. In the coming months, there are several key milestones worth investors' continuous attention. **First is the June non-farm payrolls report on July 2.** This is the first employment report covering a full month under Warsh's tenure and the most important labor market signal he will receive before the July meeting. If employment continues to be strong, the window for rate cuts will close further, and the discussion of rate hikes will move from expectation to reality. If the data significantly weakens, market expectations for the monetary policy path will loosen again, and only then will there be room to reprice the logic for rate cuts. Therefore, this single data release could very well directly set the tone for the July meeting.

**Next is the June CPI report in mid-July, the most unignorable data point between the two FOMC meetings.** Warsh made it very clear at the press conference that price stability is the current primary goal. If the CPI remains stubborn, his stance at the July meeting will only be more hawkish. If inflation shows a substantial decline, the market will diverge on his next judgment. Regardless of the outcome, this data release will trigger significant volatility on the day it is published. **Finally, there is the second FOMC meeting on July 28-29. This might be the first rate decision truly belonging to Warsh.** At this July meeting, with the accumulation of non-farm payroll and CPI data, he will need to make a real policy choice. By then, the market's judgment of him will be clearer, and the contours of his direction will be more complete. **Of course, the mid-term elections in the second half of the year are undoubtedly a variable on a longer time scale.** As the election approaches, the tension between the White House and the Fed is destined to be amplified again. Trump's desire for rate cuts will not disappear, and Warsh's statement at the hearing—"I would not agree"—will be repeatedly tested every time political pressure mounts. The proposition of monetary policy independence will continue to be background noise for the market throughout the second half of the year.

New Chair, Old Inflation, and a Stronger-Than-Expected Jobs Report: How Will Global Assets Be Repriced After Warsh’s Debut?

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