Fed hawks gain the upper hand: rate could rise as early as 2026, despite a pause
Kevin Warsh's first meeting as head of the Federal Reserve (Fed) was marked by hawkish rhetoric. Although the key interest rate was left unchanged at 3.50–3.75% for the fourth consecutive time, the signals the market received from the regulator turned out to be much more aggressive than expected.
The main surprise was the split within the Federal Open Market Committee (FOMC). Nine of its 18 members voted for a rate hike in 2026. This is a dramatic reversal: until recently, the majority leaned toward easing policy or, at the very least, a prolonged pause. Now, the hawkish bloc has effectively secured half the votes, indicating a significant shift in sentiment.
Neutral rhetoric, but hawkish actions
At first glance, the Fed's final statement appears balanced. The phrase about "additional rate adjustments" was removed, and the regulator emphasized that the approach will now be entirely data-dependent. However, behind this neutrality lies a troubling signal: inflation stubbornly hovers near 4.2% year-over-year, more than double the Fed's 2% target.
In my assessment, it is precisely high inflation, fueled by supply shocks including in the energy sector, that is forcing FOMC members to revise their forecasts. Citadel Securities, for example, already points to a growing likelihood of a rate hike as early as September this year. The arguments are a strong labor market and high demand, which create additional inflationary pressure.
Markets in the red: reaction to the "hawks"
Wall Street reacted immediately and predictably. The S&P 500 fell 0.6%, the Nasdaq Composite lost 0.7%, and the Dow Jones dropped 160 points. Investors began selling off, locking in profits amid increased uncertainty.
The reaction of the debt market was particularly telling. The yield on two-year Treasury notes jumped 11 basis points to 4.153%, while the ten-year yield rose 4 basis points to 4.469%. This is a classic signal that the market is pricing in higher rates in the future.
Warsh's debut, during which he stated at his first press conference a preference for a "more restrained" Fed and a reduction in the volume of forward guidance for the market, only amplified volatility. Fidelity analysts had warned of such a reaction, and their forecasts came true.
Expert opinion
The market seems to have lived too long under the illusion of imminent easing. The current makeup of the FOMC is a direct signal that the fight against inflation is far from over. For the cryptocurrency market, which is traditionally sensitive to the cost of borrowing, this means continued pressure on risk assets. In the coming months, we will likely see increased correlation between bitcoin and traditional markets, and any positive macroeconomic data will trigger not a rally, but fears of further tightening.