Debut Shocks the Market: What Did the New Fed Chair Kevin Warsh Say? [Cheng Tan Speaks, Episode 2]

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Introduction of the guest lecturer for this column:

The Drop at 2 A.M.: The Dot Plot Was Much More Hawkish Than Expected

Hello to the friends of Wallstreetcn, I am Cheng Tan from Tantu Macro. Today just happens to be the conclusion of the FOMC meeting, so I’ll share our views on this meeting.

Let’s first look at the overnight market reaction. The first drop occurred at 2 a.m., after the Fed released its interest rate decision and economic projection dot plot. The adjustment was quite obvious, mainly because the dot plot was much more hawkish than the market expected.

Before the meeting, what were the approximate predictions of overseas investment banks and investors for the dot plot? For 2026, the median forecast was no hikes or cuts; for 2027, one cut; for 2028, two cuts. The market estimated that those voting for hikes would be about three to six people, with the remaining ten-plus being for no change or cuts.

But the actual dot plot was far more hawkish. The median forecast for 2026 showed that half the members thought hikes were needed, and half thought no change or cuts were appropriate—exactly nine votes on each side. Fed Chair Kevin Walsh himself did not submit a dot plot forecast, so effectively there are nine members clearly supporting hikes, a much higher proportion than expected. The median forecast for 2027 was also for no change, while overseas markets had generally expected one cut; also relatively hawkish. Once the dot plot was released, the expected number and timing of hikes for the year obviously increased and the pace of tightening was brought forward.

The good news is, for 2028 the median rate remains two cuts, with the long-term neutral rate unchanged at 3.1%. This indicates that FOMC members believe the current rate is still in restrictive territory, above the long-term neutral rate, and that there’s been no upward revision to the long-term path for hikes.

This also explains why the two-year yield rose especially sharply after the rate decision, while the ten- to thirty-year yields rose relatively little. The entire curve reflected a bear-flattening move, with the adjustment mostly bringing the pace forward rather than expanding the long-term space for hiking.

As for the economic projections, changes were small. The 2026 unemployment rate was revised down slightly by 0.2 percentage points, with 2027 unchanged. Due to higher oil prices, the 2026 PCE inflation and core PCE inflation were revised up significantly, but 2027’s revision was small. Overall, the key market logic is: the number of FOMC members supporting hikes in the dot plot is more than previously expected.

Statement Cut Down by Two-Thirds: Only Discusses the Present, Not the Outlook

From the statement, there weren’t many surprises, but its length was much shorter than before—about two-thirds less than the April statement.

The Fed removed all forward guidance language from the statement. For example, statements like “under what conditions will the Fed adjust monetary policy” were all omitted. The statement retained just three parts: the basic outcome of this rate decision; recent key economic facts (such as “robust economic growth”, “strong productivity and capital investment”, “inflation above target, partly due to rising global energy prices”); and a strong commitment to the 2% inflation target, saying the Fed remains firmly committed to achieving it.

Only current conditions and commitments are discussed, not the outlook. This reflects a different approach to forward guidance and market communication under Walsh.

Four Changes and One Constant at the Press Conference

At the press conference, Walsh displayed four changes and one constant.

The first change: he initiated a gradual reform of the Fed’s monetary policy framework. Walsh announced the creation of five working groups on five topics: the Fed’s communication strategy, balance sheet policy, economic data sources, U.S. productivity issues, and the inflation framework (including whether there are better inflation metrics). He said initial research conclusions may be available within the year, after which the FOMC may consider adopting some recommendations to push for future reforms.

Interestingly, when asked about issues like balance sheet reduction, communication, or the impact of AI on productivity, Walsh responded by referencing the “working groups”, meaning “we’ll study it, but I can’t give a conclusion now.” This can be understood both as a sign of reform and as a communication tactic to avoid commitment.

The second change: he places great emphasis on inflation. During the Q&A, Walsh mentioned inflation 12 times and the job market only 5 times. He specifically stated that the Fed will not reconsider the 2% inflation target until inflation reaches precisely 2.0% or below—placing emphasis on the digit after the decimal point.

This is actually different from his previous stance—“the digit after the decimal point doesn’t matter”—and shows that after becoming Fed Chair, he pays more attention to inflation. The press conference even gave the illusion that the Fed is turning from a dual mandate (employment and inflation) to a single inflation target; though this is just an illusion—the dual mandate is still intact.

The third change: he pays attention to supply-side changes. Walsh set up a special research group for AI to study how AI improves productivity and affects jobs and inflation. He believes AI’s current impact is felt mainly on the demand side, but whether there will be supply-side effects in the future remains to be seen. He also acknowledged that central banks have traditionally measured demand better than supply, but should value supply-side measurement as well.

The fourth change: He has excessive respect for FOMC collective decisions. When asked about rates, inflation, and jobs, Walsh rarely gave personal opinions—he mostly restated the meeting statement. That’s why, as the press conference occurred, market adjustment intensified—investors realized no new actionable information could be gotten from Walsh, as he simply repeated the statement and data from the dot plot, with the only new emphasis being the 2% inflation target. The market could only interpret this in a hawkish way, though this could just be Walsh’s communication style.

So what hasn’t changed? The de-emphasis on forward guidance hasn’t changed. The difference between Walsh and Powell on this issue isn’t that large. Powell repeatedly emphasized during his term that the dot plot’s forecasts aren’t highly reliable and shouldn’t be overly trusted. Walsh has done a bit more by setting up a working group to study whether to change forward guidance. The Fed already reviewed its monetary policy framework in 2025, which included studying communication and forward guidance, but didn’t reach a consensus for reform. This time, Walsh looks for some external input, possibly leading to better proposals. So the direction of de-emphasizing forward guidance hasn’t changed in essence.

Market Reaction: The Essence of This Tightening Is Front-Loaded Pace, Not Expanded Space

From the market’s response, this is a classic monetary policy tightening. But more precisely: this is a front-loading of rate hikes, not a lengthening of the cycle or increase of the future pace of hikes.

The U.S. Treasury yield curve showed a clear bear-flattened pattern: short rates up more than long rates, particularly the 30-year yield was almost unchanged. The reason is that the dot plot’s long-term forecasts haven’t changed. Equities, gold, and risk currencies also saw some declines, but by the Asian session, many assets had recovered lost ground.

Is the Market’s Rate Hike Expectation Overdone?

We believe the market’s rate hike expectations after this meeting are somewhat overdone.

Implied rate hike odds in Fed funds futures: July hike probability 30%, September close to 45%, probability of a hike this year close to 90%. That’s a highly front-loaded expectation.

But we think there’s no need to rush like this. On one hand, many FOMC members’ inflation forecasts for the June meeting were probably made before the Iran-U.S. oil deal. After that weekend, oil prices fell rapidly, and U.S. gasoline prices also retreated from highs—so inflation forecasts for the coming months may see downward adjustment. Plus, we haven’t seen higher oil affect U.S. core or super-core inflation—over the past three months, super-core inflation has fluctuated steadily at 0.1–0.2% month-on-month, so there’s little need to worry for now.

The Labor Market Is Still in Early Recovery—Tightening Shouldn’t Be Too Fast

The U.S. job market has shown some signs of recovery but is only at the early stage. The unemployment rate has only fallen by 0.2 percentage points from the start of the year. The employment diffusion index, measuring the share of industries showing marginal improvement, has been strengthening for several months but remains at the lower end of the past 20 years in terms of breadth.

This relatively weak or early recovery requires the Fed to be more cautious in tightening policy. We believe two rate hikes in 2027 are reasonable, but in terms of timing, the Fed should wait until sustained improvement in the job market is seen—when it’s already driving down wage inflation—before tightening policy. This would be more reasonable and consistent with the Fed’s historical habits.

We are relatively optimistic about job improvements and believe that in the coming quarters, the job openings/unemployment rate ratio will trend higher. If this is correct, this indicator leads wage inflation by about two quarters. This means by the end of this year, wage disinflation may stop, and by 2027, wage growth could resume moderately. At that point, one or two hikes by the Fed would be reasonable.

The direction is right, but the pace is a bit too fast.

Future Rate Hikes Are Completely Different from 2022: This Is a Fine-Tuning Around Neutral

Whether it’s hikes within 2026 or in 2027, these are all fine-tuning near neutral rates. The key difference from 2022: the U.S. economy in 2022 was overheated, inflation was very high, rates were low, and the Fed had to chase a very hot economy, so the rate hike cycle was rapid.

But now, U.S. policy rates are close to neutral. If data improve as expected in the coming quarters, one or two more hikes are fine; if data weaken and unemployment rises, two or three cuts are also ok. So this is just fine-tuning, with relatively small market impact.

When will hikes have a bigger market impact? If, after two or three hikes in 2027, the Fed finds the economy and inflation still rising—then hints that more hikes and a higher terminal rate are needed—that is, not just short rates rising but the long-term terminal rate rising sharply—then one needs to be vigilant. That would mean the Fed won’t stop until the economy and inflation are forced lower; in that scenario, risk asset and commodity investors should be more nervous.

Summary: Some Rhythm Disruption, But No Change in the Big Picture

This meeting has caused minor disruption to the rhythm, but overall has not fundamentally changed the relatively stable outlook for the second half of the year in the economy and monetary policy.

Going forward, two things are worth attention: first, the U.S. economic data itself—will it create new disturbance for hikes or cuts; second, will the five working groups’ reports at year-end have real impact on future Fed policy.

If you care about short-term returns in the next six months, now is a time to be cautious and avoid rushing to add risk assets. Wait for a clear signal, then position yourself accordingly—it’s not too late. Medium to long term, the U.S. economy will continue a mild recovery, with high rates and a relatively strong dollar likely to persist for a while. But debt, inflation—these bigger issues remain unresolved; the market is merely waiting for the next catalyst.

“Cheng Tan Says” 2026 Full-Year Column Plan

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