Late at night, two rounds of selloff— the Federal Reserve has drawn the line

—When the market needs reassurance most, the Fed reminds everyone: if inflation won’t cooperate, the central bank won’t step in to save the day.

All the key indicators we tracked on Monday broke down across the board:
Oil prices surged sharply. U.S. crude oil far exceeded $75, closing at $78;
Gold prices fell sharply, at one point dropping below $4,000;
U.S. stocks fell across the board. The Dow Jones fell 0.26%, the S&P 500 fell 0.79%, and the Nasdaq fell 1.55%;
At the same time, the U.S. Dollar Index climbed above 101, and the 10-year Treasury yield rose above 4.60%.

Crude oil, the dollar, and Treasury yields all moved to dangerous levels, putting pressure on other markets. Compared with gold’s decline, U.S. equities look slightly more cautious.

Yesterday saw many negative events—such as the U.S. launching attacks on Iran for three consecutive days, and South Korea’s stock market crashing—but what worries us most is one sentence from the Fed:
Fed Governor Christopher Waller (a standard-bearer for the traditionally dovish/neutral camp) said: “If core inflation coming out this week is hot again, then the FOMC will need to consider tightening monetary policy in the near term.”

First, Waller’s remarks came at about 00:00 Beijing time, when the market was still falling. The Fed didn’t prop up the market—instead, it triggered a second wave of selloff, which is clearly visible in gold’s intraday action: one selloff was driven by oil, and the other was driven by Waller’s speech.

Second, judging from the speech itself, it’s the most hawkish signal the Fed has sent so far this year—though it is conditioned, the words “rate hikes in the near term” are extremely sharp, carrying a sense of urgency. The probability of a 25-basis-point rate hike in July has already risen to 50%.

In the past few weeks, the market could still comfort itself with: “Oil price gains are only a temporary geopolitical shock. As long as core inflation (excluding energy and food) holds steady, the Fed won’t do anything reckless.” But Waller directly made it clear this time: “We can no longer blame inflation on past tariffs and the surge in oil prices.”

Third, Waller chose the day before this week’s inflation data release (forcing intervention in inflation expectations). As a rule, Fed officials usually keep a low profile before CPI data is released. Wall Street’s overall expectation is that headline inflation will cool somewhat (y/y expected to fall from 4.8% to 4.2%), while core inflation stays unchanged (expected to remain at 2.9%)—which should have been good news, but what Waller emphasized was core inflation.

What truly happened yesterday wasn’t that the market suddenly feared war—rather, the market began trading “high oil prices, high inflation, and a more hawkish Fed” at the same time. The importance of today’s CPI is whether it can dismantle the “near-term rate hikes” framework Waller just built.

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