Federal Reserve Chair Kevin Warsh shook financial markets with a remarkably hawkish performance at his first FOMC press conference on June 17. Breaking from predecessor Jerome Powell’s dovish tone, Warsh offered no forward guidance on rate cuts, instead stressing the committee would “do whatever it takes” to bring inflation back to its 2% target. He said he wants markets to “price assets based on real economic conditions, not guessing how Fed officials will interpret data,” and acknowledged that inflation remains elevated due to supply shocks, but did not use that as an excuse to ease policy.
Warsh’s Hawkish Tone: No Rate Cut Pledge, Reiterates 2% Target
In a lengthy press conference, Warsh delivered multiple hawkish signals. According to the official transcript released by the Fed, Warsh said the central bank is “fully capable of achieving the 2% inflation target, and that’s exactly what we intend to do,” with the committee “clear and unified” on this stance. When asked about a phone call with President Trump, Warsh declined to comment but confirmed multiple meetings with Treasury Secretary Bessent. He also said press conferences are effective communication channels but “did not commit to holding one after every FOMC meeting,” adding to market uncertainty.
Market Turmoil: Yields Surge, Rate Hike Expectations Repriced
Warsh’s hawkish stance triggered immediate bond market turmoil. Bloomberg reported traders dumped short-term Treasuries, causing some yields to record their biggest one-day gains in over a year. Kate Moore, chief investment officer at Citi Wealth, said: “The message from policymakers is very clear – rates aren’t coming down anytime soon.” CME FedWatch data showed the probability of a rate hold in July plummeted from 91% pre-meeting to 64%, while the chance of a 25-basis-point hike jumped from 8.9% to 35.1%, and a 50-bp hike from 0% to 1%. Looking to year-end, the probability of no rate change by December collapsed from 38.2% to 14.2%, while the chance of two 25-bp hikes doubled from 16.2% to 33.8%, and three hikes rose from 2.4% to 13.5%. Markets have fully priced in two rate hikes by the end of Q1 2027.
Goldman Sachs Warns: If Inflation Stays Hot, September Hike Cycle Looms
Alongside the market reaction, Goldman Sachs vice chairman and former Dallas Fed president Robert Kaplan issued a warning. Kaplan told Bloomberg that “if inflation data between now and September doesn’t cool, it would be wise for the Fed to act in September or autumn.” He noted that if inflation remains sticky, policy is still too loose. Kaplan highlighted a historical pattern: “The Fed rarely acts just once; rate hikes tend to come in sequences of two or three. So if you act in September, you should be prepared for one or two more.” Futures pricing already reflects this expectation, with traders fully pricing a 25-bp hike by October – just ahead of the US midterm elections.
Fed Reform Launched: Five Working Groups to Reshape Operations
Beyond rate signals, Warsh announced a “Fed reform” initiative, appointing five working groups to review the central bank’s operational processes. Individual FOMC projections show half of members see a need for rate hikes by year-end, aligning with market pricing. Warsh stressed that if the Fed does its job, it can “sustain strong economic growth, low prices, and robust employment simultaneously.” For crypto markets, a hawkish Fed means tighter liquidity for risk assets. Bitcoin briefly bounced after the FOMC decision but remains under pressure from rate hike expectations. If the Fed starts a rate hike cycle in September or earlier, it could fundamentally alter valuation logic for all risk assets.