Fed hawks gain the upper hand: probability of a rate hike in 2026 sharply increases
Kevin Warsh's first meeting as head of the Federal Reserve did not bring any surprises in the form of a rate change, but it did deliver a much more important signal to the markets about the future course of monetary policy. The key interest rate was left in the range of 3.50%–3.75%, marking the fourth consecutive meeting without changes. However, the real intrigue lay not in the decision itself, but in the tone and forecasts.
Sharp Reversal: From Dovish to Hawkish
The most significant outcome of the meeting was a radical shift in the "dot plot" of FOMC members' forecasts. Nine out of eighteen committee members now expect at least one rate hike in 2026. This is a stark contrast to previous meetings, where expectations of a cut or, at the very least, a prolonged pause dominated.
The official Fed statement completely removed the wording about "possible additional adjustments" toward easing. Instead, the regulator adopted a wait-and-see, fully neutral stance, emphasizing that further steps will depend solely on incoming macroeconomic data. The reason for this tightening of rhetoric is obvious: inflation continues to stubbornly hover around 4.2% year-over-year, significantly exceeding the 2% target.
Markets Reassess Scenarios
The Fed's signal coincided with a warning from Citadel Securities, which sees a growing risk of a rate hike as early as September. Company analysts point to sustained wage growth, high consumer demand, ongoing supply chain disruptions, and a boom in artificial intelligence investments—all factors that continue to fuel price pressure.
The market reaction was swift. The S&P 500 index fell by 0.6%, the Nasdaq Composite lost 0.7%, and the Dow Jones Industrial Average dropped 160 points. A sell-off began in the bond market: the yield on two-year Treasuries jumped 11 basis points to 4.153%, while the ten-year yield rose 4 basis points to 4.469%. Investors are pricing in tighter policy, leading to a stronger dollar and a decline in risky assets.
Warsh's Debut Under the Microscope
At his first press conference, Kevin Warsh made it clear that he intends to adopt a "more restrained" approach and reduce the volume of advance signals to the market. This instantly dashed the hopes of those who associated his arrival with a softer policy. The new Fed chairman clearly outlined his priority: fighting inflation at all costs. Markets received a clear confirmation: the era of cheap money is definitively over, and a period of heightened volatility lies ahead.
In my view, the current situation is a classic example of markets ignoring structural inflation risks for too long. Rising geopolitical tensions, particularly the energy crisis linked to the situation around Iran, only add fuel to the fire. Investors in cryptocurrencies and other risky assets should prepare for the possibility that the Fed's "hawkish" stance could persist until the end of the year, putting pressure on prices.