Vosh's debut night: More important than rate cuts is how the Federal Reserve reshapes expectations

Author: Jim, Frank, MSX MaiTong

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

But this time, the market's real concern is no longer just a simple question of "whether to raise or cut interest rates."

According to current market expectations, the Federal Reserve is highly likely to hold steady at this meeting, keeping the federal funds rate in the 3.50%—3.75% range. In other words, the fact that rates will remain unchanged in June is not surprising in itself and has even been priced in by the market in advance.

What truly matters is that this is the first full meeting chaired by Kevin Warsh since he took over as Fed Chair.

More importantly, this meeting will also include a summary of economic projections, meaning the market will see the rate decision, policy statement, dot plot, and economic forecasts all at once. For investors, this is not an ordinary meeting, but the first full appearance of the Warsh version of the Federal Reserve.

Therefore, the core question of this week's FOMC is not whether Warsh is hawkish or dovish, but what should really be watched?

1. June is highly likely to hold steady, but the market is trading on the "next step"

To start with the conclusion, the Fed is highly likely to keep rates unchanged this week.

Based on interest rate futures pricing and mainstream institutional expectations, there is almost no suspense about holding rates steady in June. For example, the market generally expects the Fed to keep the benchmark rate in the 3.50%—3.75% range, and CME FedWatch shows a 96.6% probability that the rate will stay within this range at the June 17 meeting.

Therefore, the real disagreement in the market is not about June, but about several meetings in the second half of the year, which is also the most easily misinterpreted aspect of this FOMC.

If we only look at the June rate decision, it’s easy to draw a simple conclusion: since there will be no rate hike, does that mean a positive signal for U.S. stocks?

Not necessarily.

Because what U.S. stocks are truly afraid of is not this pause in rate hikes, but the market’s original "rate cut path" being overturned.

Recently, risk assets—especially AI, semiconductors, software, and small-cap growth stocks—have been enjoying two layers of expectations: one is that the economy is not in obvious recession, and the other is that the Fed still has room to cut rates in the future. As long as these two expectations hold simultaneously, high-valuation assets still have reason to maintain a higher risk appetite.

But now the situation has become more complicated. In May, US CPI year-over-year rose again to 4.2%, energy prices increased by 23.5% YoY, and gasoline prices surged by 40.5%. This indicates that Middle East tensions, oil price volatility, and supply chain disruptions are beginning to enter inflation data. Meanwhile, core CPI rose 0.2% month-over-month and 2.9% year-over-year, which, while not completely out of control, remains above the Fed’s 2% target.

This set of data puts the Fed in a tricky position.

If Warsh continues to emphasize the room for rate cuts, the market will question whether the Fed has underestimated the rebound in inflation; but if he signals a rate hike directly, high-valuation assets could be immediately revalued downward.

So, the most likely scenario for this meeting is not a clear dovish stance nor a direct hawkish turn, but the Fed shifting from "more likely to cut" to "keeping options open."

But here’s the key: this sounds mild, but it’s not mild in market pricing.

Because once rate cuts are no longer the default path, the valuation anchors for U.S. stocks will need to be recalculated. Especially for those stocks that have already risen significantly and whose valuations are stretched, their core fear is not whether rates change today, but that the market will suddenly realize: the second half of the year is not about waiting for rate cuts, but about reassessing the risk of rate hikes.

Therefore, what truly matters this week is not whether rates in June change, but whether Fed officials’ outlooks for the next 12 months’ rate path are upwardly revised.

The dot plot is the first card in this meeting.

2. Warsh is unlikely to be outright dovish; key is how he explains inflation

Warsh’s current position is very delicate.

On one hand, he has a policy stance closer to that of the Trump administration, and the market once thought he might be more willing than Powell to support lower rates; but on the other hand, he must establish his policy credibility with his first appearance, especially amid rising inflation.

This means he’s unlikely to be overly dovish right away.

The complexity of this inflation cycle lies in the fact that it involves both short-term energy shocks and potential risks of inflation spreading to other prices.

Focusing only on core CPI, the market might say underlying inflation is still under control; but looking at overall CPI and energy prices, the Fed finds it hard to ignore inflationary pressures altogether. More troubling is the Fed’s Beige Book, which shows multiple regions reporting rising costs and selling prices, with energy-related costs spilling over into transportation, packaging, food, and fertilizer, and non-labor input costs rising faster than sales prices.

This means Warsh cannot just look at a 0.2% MoM core CPI increase. The real question he needs to answer is: Is the current inflation just a temporary energy shock, or is it turning into broader secondary inflationary pressures?

If Warsh believes that oil price shocks and tariff disruptions are mostly one-off, and core inflation remains manageable, the market will interpret this as the Fed not rushing to hike rates, leaving room for risk assets to breathe.

But if he emphasizes that energy prices are passing through to transportation, food, wages, and service prices, or explicitly mentions the risk of inflation spreading, the market will interpret this press conference as a hawkish shift.

Thus, the importance of the press conference is not less than the rate decision itself.

The market is listening not just for whether Warsh says "inflation is high or low," but how he characterizes this inflation cycle.

If he defines inflation as a "short-term shock," that’s a dovish signal; if he emphasizes the risk of spreading inflation, that suggests the Fed still needs to maintain a tighter stance; if he further stresses that the Fed must re-anchor inflation expectations, the market will start to worry about subsequent dot plots, balance sheet reductions, and rate paths turning hawkish.

For U.S. stocks, the difference is huge.

The former means valuations can still be supported by liquidity and risk appetite; the latter means U.S. Treasury yields could rise again, and high-valuation tech stocks will be re-priced by the market.

Because of this, the real focus of this FOMC is not whether Warsh is hawkish or dovish, but whether he will lower the Fed’s inflation tolerance.

This is the most critical signal the market is watching.

3. More important than rates: balance sheet reduction, communication style, and liquidity expectations

The biggest difference between Warsh and Powell may not just be interest rates, but also balance sheet management and communication style.

In recent years, markets have grown accustomed to Powell’s high transparency: post-meeting press conferences, frequent speeches by officials, the dot plot providing guidance, and markets trading around these signals with expectations of rate cuts or tightening.

But Warsh has always been cautious about such forward guidance. He prefers to reduce the Fed’s explicit commitments on future rate paths and does not want markets to overly rely on central bank statements to make asset price bets.

This could bring an important change: future trading of the Fed might no longer focus solely on "will they cut rates," but return to data itself.

In the short term, Warsh is unlikely to completely discard the dot plot or immediately plunge the Fed into a "communication black box." But he could very well reduce commitments, lessen guidance, and emphasize data dependence, thereby diminishing the influence of the dot plot and forward guidance on markets.

This may not be friendly to risk assets. Because in recent years, the valuation support for many high-valuation assets has come from the market’s anticipation of liquidity conditions. As long as the market believes the Fed will eventually cut rates, long-duration growth stocks tend to react early. But if Warsh reduces commitments, markets will have to bear greater interest rate uncertainty.

Another aspect is the balance sheet. As of June 10, the Fed’s total assets are about $6.725 trillion. For Warsh, shrinking the balance sheet could serve as a "middle ground"—initially keeping rates steady but signaling tightening through balance sheet normalization.

The market’s reaction will be subtle.

If Warsh simply states that the balance sheet will continue to normalize gradually, the market can probably accept that; but if he hints that balance sheet reduction could be used more actively in the future to curb inflation and reduce liquidity dependence, then U.S. stocks will need to reassess liquidity discounting.

Especially for AI, semiconductors, software, and high-quality growth stocks, recent core trading has not only been about earnings growth but also about the environment of rates and liquidity. Once the market begins to interpret "Warsh’s Fed is not in a rush to cut rates, nor does it want to keep relying on the central bank," high-valuation sectors could face valuation pressures.

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

• First, whether the dot plot shifts upward, especially whether it moves from "still room for rate cuts" to "no cuts or even rate hikes" within the year;

• Second, how Warsh explains inflation—whether energy shocks are seen as short-term disturbances or if he emphasizes secondary inflation and cost pass-through risks;

• Third, whether balance sheet reduction and communication style are given greater importance, becoming the starting point for Warsh’s reshaping of the Fed’s policy framework;

If the outcome is steady rates, a mild upward revision of the dot plot, and Warsh emphasizing data dependence without rushing to hike, the market may experience short-term volatility but likely won’t break the main trend of AI and tech stocks, provided oil prices continue to fall, 10-year U.S. Treasury yields don’t rise further, and high-quality tech stocks can continue their recovery.

But if the dot plot shifts significantly upward, Warsh emphasizes inflation spreading risks, or describes balance sheet reduction as a more important tightening tool, then U.S. stocks should be cautious of a short-term valuation reset—and the most vulnerable will be high-valuation tech, small-cap growth stocks, and long-duration assets most sensitive to interest rates.

In other words, the best outcome for this FOMC isn’t Warsh going full dove, but acknowledging inflation risks without rushing to tighten; the worst outcome isn’t a rate pause in June, but the market realizing that the Fed’s rate-cut narrative has officially ended.

Therefore, the strategy this week is not to blindly bet on a direction before the FOMC.

Conclusion: Don’t pre-commit to an answer—wait for the market to give signals

So, this week, it’s not advisable to blindly bet on a direction before the FOMC.

Markets tend to swing first and then reverse after the meeting—either rallying then dropping or vice versa. The more prudent approach is to wait until the dot plot, press conference, and U.S. Treasury yields confirm the trend before increasing positions.

In short, this FOMC is not about whether Warsh is hawkish or dovish, but whether he will redefine the Fed’s reaction function.

If the answer is "no," then risk-on trades may continue; if "yes," the market will need to relearn how to price a Fed that offers fewer commitments, emphasizes inflation, and prioritizes liquidity discipline.

Let’s wait and see.