Rate hike expectations just a false alarm? Warsh's Fed may be more "dovish" than imagined!

Although the market widely fears a rebound in inflation and is betting on multiple rate hikes in 2026, the divergence of key inflation indicators and the bond market's reaction are sending distinctly different signals. When overly pessimistic rate expectations are proven wrong, interest-sensitive industries will experience a round of valuation recovery.
The current consensus on Wall Street seems to be tilting toward "hawkish." Due to geopolitical conflicts and tariff policies, price pressures persist, and major institutions like Bank of America are predicting that the Federal Reserve will restart the rate hike cycle in 2026, not ruling out three consecutive rate hikes.

However, Robert Ross, founder of TikStocks, believes that amid this extreme anxiety, the market may have developed a "perception bias" regarding inflation.

Typically, a rebound in inflation data that exceeds expectations would directly push up U.S. Treasury yields. But recent data performance is highly revealing: when the core PCE data hit a high not seen since 2023, the 2-year Treasury yield, which is most sensitive to policy rates, fell instead of rising.

This phenomenon sends a clear signal: smart money does not believe inflation is spiraling out of control. Instead, the market believes that the worst of inflation is over and that elevated rate expectations have already been priced in.

Ross said that the public's perception of Fed Chair Kevin Warsh mostly focuses on his tough exterior, but they overlook the micro-variables in his policy logic. During congressional hearings, Warsh explicitly expressed a preference for the "trimmed-mean PCE" over the widely watched core PCE.

Ross further pointed out that the "temperature gap" between these two indicators is significant. While core PCE excludes energy and food, it is still vulnerable to extreme price fluctuations. In contrast, the "trimmed-mean PCE," which excludes extreme values, better reflects underlying inflation dynamics. Currently, this indicator is only 2.4%, far lower than core PCE's 4.1%.

This means that in Warsh's "toolkit," the inflation situation is far less severe than the public imagines. His future policy focus may lean more toward maintaining a strong dollar and reducing the balance sheet, rather than simply and crudely suppressing the economy by raising the federal funds rate.

Beyond Warsh's personal preferences, internal Fed rhetoric is also beginning to loosen. New York Fed President Williams and St. Louis Fed President Waller have recently shown patience with the current restrictive interest rate policy. Waller even stated outright that he can accept observing further downside in inflation at the current rate levels.

Additionally, crude oil prices, which act as an inflation accelerator, have significantly fallen from a previous high of $96 per barrel to around $70. This collapse on the cost side will provide ample buffer room for the Fed's policy choices in the second half of the year.

Ross said that once the market realizes that the "rate hike wave" has not materialized, the previous panic selling will reverse. Sectors that were previously constrained by high interest rates will experience a round of valuation recovery.

Among them, real estate and infrastructure are most sensitive to interest rates. Once borrowing costs stop rising, corporate profit margins will be directly released. Additionally, interest rates are the "tightening spell" over tech stocks. As long as rates peak, market confidence in future growth will rebound, pushing up stock price ceilings.