The Eve of Walsh's Debut: More Important Than a Rate Cut, Can the Fed Reshape Expectations?

Original Authors: Jim, Frank, MSX Maitong

The most important macro event for U.S. stocks this week is undoubtedly the June FOMC meeting.

But this time, what the market really cares about is no longer a simple question of "hiking" or "cutting."

According to current market expectations, the Fed is highly likely to hold steady at this meeting, maintaining the federal funds rate in the 3.50%—3.75% range. In other words, a rate pause in June itself is not surprising and has already been priced in by the market.

What truly matters is that this is the first time Kevin Warsh is fully chairing a rate-setting meeting since becoming Fed Chair.

More critically, this meeting also includes the Summary of Economic Projections (SEP), meaning the market will simultaneously see the rate decision, policy statement, dot plot, and economic forecasts. For investors, this is not an ordinary meeting; it is the first complete debut of the Warsh-led Fed.

Therefore, the core question for this week's FOMC is not whether Warsh is hawkish or dovish, but what investors should really be looking at.

1. June is Likely a Hold, But the Market is Trading the "Next Move"

Let's start with the conclusion: The Fed is highly likely to hold steady this week.

Based on interest rate futures pricing and mainstream institutional expectations, there is little suspense that the June meeting will result in rates staying unchanged. For instance, the market generally expects the Fed to maintain the benchmark rate in the 3.50%—3.75% range. The CME FedWatch Tool also shows a 96.6% probability of rates remaining in this range after the June 17 meeting.

Therefore, the real divergence in market opinions lies not in June, but in the meetings scheduled for the second half of the year. This is the most frequently misinterpreted aspect of this FOMC meeting.

If one only looks at the June rate decision, it's easy to jump to a simple conclusion: Since there's no rate hike, isn't that bullish for U.S. stocks?

Not necessarily.

Because what truly scares U.S. stocks is not the lack of a rate cut this time, but the possibility that the "rate cut path" the market has been trading on gets overturned.

Over the past period, risk assets, especially AI, semiconductors, software, and small-cap growth stocks, have enjoyed a dual-layer expectation: one, that the economy isn't significantly contracting, and two, that the Fed still has room to cut rates in the future. As long as both expectations hold, high-valuation assets can maintain a relatively high risk appetite.

But the situation has become more complex. The U.S. CPI in May rose year-over-year to 4.2%, with energy prices up 23.5% and gasoline prices surging 40.5%. This means that geopolitical tensions in the Middle East, oil price volatility, and supply chain disruptions are starting to show up in inflation data. Meanwhile, core CPI rose 0.2% month-over-month and 2.9% year-over-year. While not entirely out of control, it remains above the Fed's 2% target.

This set of data puts the Fed in an awkward position.

If Warsh continues to emphasize room for rate cuts, the market might question whether the Fed is underestimating the rebound in inflation. However, if he directly signals a rate hike, high-valuation assets could immediately face valuation compression.

Therefore, the most likely outcome for this meeting is not an explicitly dovish stance, nor a direct turn hawkish, but a shift from the Fed's "next move is more likely to be a cut" to "keeping options open."

But here's the crux: This sounds moderate, but it's not moderate for market pricing.

Once rate cuts are no longer the default path, the valuation anchor for U.S. stocks needs to be recalculated. Especially for growth stocks that have already seen large gains and have overstretched valuations, what they fear most is not whether rates change today, but the market suddenly realizing: perhaps the second half isn't about waiting for cuts, but about reassessing the risk of hikes.

So, what truly matters this week isn't whether the June rate changes, but whether Fed officials' projections for the rate path over the next 12 months have shifted upwards.

The dot plot is the primary card to watch at this meeting.

2. Warsh Can't Easily Sound Dovish; Watch How He Explains Inflation

Warsh is in a delicate position.

On one hand, his past policy inclinations are closer to the Trump administration's, leading the market to believe he might be more supportive of lower rates than Powell. On the other hand, he must establish his own policy credibility in his debut, especially against the backdrop of re-emerging inflation.

This makes it very difficult for him to start with an overwhelmingly dovish tone.

The complexity of the current inflation cycle also lies in it being a mix of short-term energy supply shocks and the potential risk of spillover to other prices.

If you only look at core CPI, the market can argue underlying inflation isn't out of control. But looking at headline CPI and energy prices, the Fed can hardly ignore the inflationary pressures. More troublingly, the Fed's Beige Book also indicates rising cost and selling price pressures in several regions recently, with energy-related costs spilling over into transportation, packaging, food, and fertilizers. Non-labor input costs are rising faster than selling prices.

This means Warsh cannot just focus on the 0.2% month-over-month core CPI. The real question he needs to answer is: Is the current inflation just an energy disturbance, or is it transforming into broader secondary inflationary pressures?

If Warsh views the oil price shock and tariff disruptions as largely one-off, with core inflation still manageable, the market would interpret this as the Fed not being in a hurry to hike, giving risk assets some breathing room.

But if he emphasizes that energy prices are transmitting to transportation, food, wages, and service prices, or explicitly mentions the risk of inflation diffusion, the market will interpret the press conference as a hawkish turn.

Thus, the importance of the press conference is no less than the rate decision itself.

What the market needs to hear isn't just Warsh saying whether inflation is "high or low," but how he characterizes this inflation cycle.

If he defines it as a "short-term shock," it's a friendly signal. If he defines it as a "potential spreading pressure," it means the Fed needs to maintain a tighter policy stance. If he further emphasizes that the Fed must re-anchor inflation expectations, the market will start worrying about the subsequent dot plot, quantitative tightening (QT), and the rate path all turning hawkish simultaneously.

For U.S. stocks, this difference is massive.

The former means valuations can still be supported by liquidity and risk appetite. The latter implies that Treasury yields could rise again, and high-valuation tech stocks will be the first to be repriced by the market.

That's why the real focus of this FOMC isn't whether Warsh personally is "hawkish" or "dovish," but whether he will lower the Fed's tolerance for inflation.

That is the signal the market cares about most.

3. More Important than Rates: Balance Sheet, Communication, and Liquidity Expectations

The biggest difference between Warsh and Powell may not lie in rates, but in the balance sheet and communication style.

In recent years, the market has gotten used to the Powell era's high transparency: press conferences after every meeting, frequent official speeches, and the dot plot providing a path reference. The market could repeatedly trade "rate cut expectations" and "tightening expectations" based on these statements.

However, Warsh has always been cautious about such excessive forward guidance. He prefers the Fed to make fewer explicit commitments about the future rate path and doesn't want the market to overly rely on central bank statements to bet on asset prices.

This could lead to a significant change: trading the Fed in the future might not just involve fixating on the phrase "will it cut rates," but might require focusing back on the data itself.

In the short term, Warsh is unlikely to completely scrap the dot plot right away or immediately plunge the Fed into a "communication black box." But he could very well reduce the market impact of the dot plot and forward guidance by making fewer commitments, offering fewer path hints, and emphasizing a data-dependent approach.

This is not necessarily friendly for risk assets. In the past few years, the valuation support for many high-valuation assets stemmed from market anticipation of a loose liquidity environment. As long as the market believed the Fed would eventually cut, long-duration growth stocks would react in advance. But if Warsh makes the Fed less committed, the market must bear greater interest rate uncertainty.

The other key aspect is the balance sheet. As of June 10, the Fed's total assets stood at approximately $6.725 trillion. For Warsh, balance sheet reduction (QT) might offer a "middle path," where rates are left unchanged first, but a tighter signal is sent through balance sheet normalization.

This impact on the market is subtle.

If Warsh merely states that the balance sheet will continue to normalize gradually, the market can likely accept it. However, if he hints that QT can play a larger role in curbing inflation and reducing liquidity dependence going forward, U.S. stocks will have to re-evaluate their liquidity discount.

Especially for AI, semiconductors, software, and high-quality growth stocks, the core trade over the past period wasn't just about earnings growth, but also about the favorable rate and liquidity environment. Once the market starts interpreting this as "the Warsh Fed is in no hurry to cut rates and doesn't want the market to rely on central bank support," high-valuation sectors are likely to face valuation pressure first.

So, for U.S. stocks, the three most important signals this week are clear:

• First, has the dot plot shifted upwards, especially moving from "still room for cuts" to "no cuts or even risk of hikes" within the year?
• Second, how does Warsh explain inflation—viewing the energy shock as a short-term disturbance or emphasizing secondary inflation and cost pass-through risks?
• Third, will QT and communication style be elevated to a more prominent position, becoming the starting point for Warsh to reshape the Fed's policy framework?

If the final outcome is a hold, a modestly upwardly revised dot plot, and Warsh emphasizing data dependence without rushing to hike, the market might see short-term volatility, but the main trend for AI and tech stocks might not be broken. As long as oil prices continue to fall and the 10-year Treasury yield doesn't surge, high-quality tech stocks still have a chance to continue their recovery.

But if the dot plot shifts significantly higher, Warsh emphasizes the risk of inflation diffusion, or elevates QT as a more important tightening tool, then U.S. stocks should be wary of short-term valuation compression—and the most significant pressure will still be on high-valuation tech stocks, small-cap growth stocks, and long-duration assets most sensitive to interest rates.

In other words, the best outcome for this FOMC isn't for Warsh to sound overly dovish, but for him to acknowledge inflation risks without rushing to tighten. The worst outcome isn't the lack of a June rate cut, but the market realizing that the Fed's rate cut narrative is officially over.

Therefore, from a strategic standpoint, it's not advisable to blindly bet on direction before the FOMC meeting.

Conclusion: Don't Guess the Answer in Advance; Wait for the Market to Give Direction

So, this week's strategy is to avoid blindly betting on a direction before the FOMC meeting.

Around the meeting, the market could easily experience a "pump and dump" or "dump and pump." A safer approach is to wait for the three signals—the dot plot, the press conference, and the 10-year Treasury yield—to materialize before deciding whether to add positions.

In a nutshell, this FOMC isn't about whether Warsh utters a single hawkish or dovish word, but about whether he will redefine the Fed's reaction function.

If the answer is "no," the risk-on trade has room to continue. If the answer is "yes," the market will have to learn how to price a Fed that makes fewer commitments, focuses more on inflation, and emphasizes liquidity discipline.

Let's wait and see.