It has been only three weeks since Kevin Warsh assumed the role of Federal Reserve Chair, and the former Goldman Sachs banker and Bush-era presidential economic advisor is about to face his most critical public appearance yet. From June 16 to 17, he will preside over his first FOMC policy meeting and hold his inaugural press conference as Chair. This event is viewed as the most significant monetary policy and geopolitical event for global capital markets in the first half of 2026. A research report published on June 2 explicitly stated that the June FOMC meeting poses a "key risk" to the current low-volatility environment and consensus market positioning, potentially creating new tradable trends for the US dollar and broader FX markets. DBS Bank noted that as June 2026 arrives, the currency markets are grappling with a "dramatic and volatile shift in narrative," with all eyes on Warsh's first meeting. The backdrop for the meeting is far from comfortable. Against the persistent backdrop of Middle East conflicts driving up energy prices, multiple inflation indicators are showing clear signs of acceleration. Simultaneously, during his confirmation hearing, Warsh explicitly expressed reservations about using the traditional core PCE index as the primary policy anchor, instead favoring the Dallas Fed's "trimmed mean" PCE index, which excludes extreme price movements. This preference is less a technical choice of indicator and more a pre-laid theoretical foundation for his potential dovish policy path. The market is questioning: will a Chair who vowed during his hearing to prioritize price stability face immediate pressure to contradict his words at his first major policy summit? The traditional framework of "inflation first, then rate cuts" could be rewritten in a technical detail.
Current State of the US Economy: Slowing Growth, Rising Inflation, Robust Employment
During his campaign for the Fed Chair role, Kevin Warsh repeatedly emphasized that the Fed's failure to control inflation post-pandemic was a key source of current problems. As he takes over, this situation has not eased but has instead intensified. Inflation is climbing at its fastest pace since 2023. The US Consumer Price Index (CPI) rose 3.8% year-over-year in April, hitting its highest level in nearly three years, a significant acceleration from the 2.4% pace seen in February before the outbreak of the Middle East conflict. Core CPI (excluding food and energy) rose 2.7% year-over-year, still well above the Fed's 2% target. Regarding the PCE price index, the headline PCE rose 3.8% year-over-year in April, while the core PCE rose 3.3%. The Cleveland Fed's inflation nowcasting model suggests the May CPI could accelerate further to around 4.2%, easing slightly to 3.9% in June. However, Warsh's favored metric—the Dallas Fed trimmed mean PCE—paints a starkly different picture. This measure recorded a year-over-year increase of only 2.3%-2.35% in April, down from 2.4% in March, creating a nearly 100 basis point divergence from the core PCE's 3.3%. This divergence directly impacts Warsh's assessment of the inflation landscape: if he primarily references the 2.3% trimmed mean, he could almost declare that "inflation is significantly nearing the target"; if he references the traditional core PCE at 3.3%, the path back to the target remains distant. The difference between the two metrics is essentially the difference in potential policy paths.
Employment data, however, is sending a completely different signal. The April JOLTS job openings data, released around the same time as the April inflation figures, shocked the market: US job openings surged to 7.618 million at the end of April, far exceeding expectations of 6.866 million and reaching a near two-year high. Analysts closely watching the labor market noted that the addition of 762,000 open positions against the backdrop of persistently high inflation data suggests labor market tightness may be re-emerging as a factor pushing up wages and services inflation. Non-farm payrolls added only 65,000 jobs in April (median forecast was 70,000), significantly below the volatile range seen in the first quarter, while the unemployment rate stood at 4.3%. Despite the slowdown in job additions, the resilience of labor demand remains far stronger than anticipated.
Economic growth in the first quarter showed both strengths and weaknesses. The revised first-quarter GDP annualized growth rate was 1.6%, slightly below the initial estimate of 2.0% and market expectations of 2.0%, but showing a clear improvement from the weak, low-base 0.5% growth in the fourth quarter which was impacted by a government shutdown. The downward revision in the Commerce Department's second estimate was primarily attributed to weaker-than-initially-expected consumer spending and private investment, indicating underlying concerns about final demand. The latest Fed Beige Book reported that districts generally described modest economic growth, but rising energy costs due to the Middle East conflict are creating a complete transmission chain from the geopolitical conflict to end-consumers through transportation, packaging, groceries, and fertilizer. "Warsh is taking over at a delicate moment," a former Minneapolis Fed official told media, "The economy is slowing, but inflation and employment data don't allow for an easy pivot; you have to thread the needle very carefully."
Interest Rate Outlook: A June Hold Is Certain, Hikes Could Come Late in the Year
A hold in June is almost beyond dispute. The latest CME FedWatch Tool data shows a 96.2% probability that the Fed will maintain the current 3.50%-3.75% target range at the June meeting, with only a 3.8% probability of a small rate cut; the probability of holding rates steady in July is 84.3%. The market is highly aligned on this short-term view. However, for the second half of the year, the divergence is unsettling. Based on CME data observations, the probability of the Fed maintaining rates unchanged through the end of 2026 is approximately 40%; the probability of a cumulative 25 basis point hike is 40%, and a 50 basis point hike is 14%. For context, as recently as this spring, market pricing had completely removed the possibility of a rate hike this year; now, based on weighted probability calculations, the market is pricing in a higher chance of a 25 basis point hike than a cut. TMC Research's federal funds model predicts the Fed's policy will remain moderately restrictive, providing some degree of inflation-fighting measures. However, this slightly hawkish bias has weakened consistently in recent months and is now essentially neutral, meaning the Fed faces risks if inflation persists at current levels or rises further.
Within the 12 voting FOMC members, however, fissures are deepening. The hawkish camp is represented by Dallas Fed President Logan. In a speech in El Paso, Texas on June 3, Logan delivered the clearest signal for a rate hike since the FOMC's pivot: "I am growing increasingly concerned that, to fully achieve price stability, it may be necessary to raise rates later this year." Logan's reasoning is straightforward—with core PCE still as high as 3.3% and recent inflation data broadly strengthening, the current 3.50%-3.75% policy rate is insufficient to bring inflation back to the 2% target. Addressing Warsh's preference for the trimmed mean PCE, Logan directly countered, stating that when the structure of price increases and decreases in the economy changes rapidly, trimmed mean inflation "can sometimes be skewed and less reliable."
The bond market is sending the same warning. The 2-year US Treasury yield continues to trade above 4.0%—about 25 basis points higher than the top end of the current federal funds target range—a signal from the "implied rate options" market that has historically been the most sensitive indicator of investors anticipating earlier monetary tightening. If this implied rate expectation materializes, the Fed may be forced to implement at least one rate hike this year. A veteran Wall Street figure and head of fixed income at Jupiter Asset Management predicted to Reuters that the Fed could shift to a tightening bias at this month's FOMC meeting and hike rates by 25 basis points in July.
The dovish camp is represented by New York Fed President Williams. On June 3, Williams stated that the Fed's current monetary policy stance is "appropriate," 2026 economic growth is projected around 2%-2.25%, and the rate path has "no clear direction"—one of the strongest dovish formulations possible in rate commentary. He believes policy has given inflation enough time and that a rate hike should not be rushed. This rare "data schism" within the Fed—where different officials draw diametrically opposite conclusions based on different inflation metrics—precisely makes Warsh's upcoming choice highly sensitive: which set of data will he rely on to anchor his decision? The nearly 100 basis point gap between the two metrics is far more than a technical disagreement; it foreshadows the potential for a substantive divergence in policy paths.
Politics and Markets: Will Trump's "Favorite" Prove Who's Really in Charge?
An unavoidable dimension is Warsh's political pedigree. He was personally nominated by President Trump and successfully pushed through Senate confirmation. Trump's choice of Warsh—a former member of the Council of Economic Advisers under President George W. Bush and one of the "earliest Wall Street voices to warn about inflation post-pandemic"—is seen as a move laden with political overtones. It was during Trump's second term that Warsh began his campaign for Fed Chair late last year, crediting his eventual appointment to Trump's support. However, during his confirmation hearing, Warsh emphatically stated, "I will not be a puppet for President Trump," asserting that Fed independence is necessary, but the central bank must "earn its own legitimacy." To some observers, this statement was already aimed at signaling to markets that he is not merely following the President's lead. Critics, however, suggest there may be a "temperature gap" between Warsh's statements and his potential actions. If he wishes to meet White House expectations—Trump has privately pressured the Fed multiple times to cut rates soon—he could very well use his preference for specific inflation metrics and the data space they provide to guide market expectations toward rate cuts. But once such a path is implemented, it would face strong resistance from within the Fed. At least three regional Fed presidents have privately indicated that pushing for rate cuts with core PCE above 3% would be "a serious challenge to the Fed's credibility." Warsh must simultaneously manage political expectations from the White House and the hard inflation constraint from within the FOMC—an almost impossible balancing act.
Equally noteworthy as political pressure is the "resistance" from the bond market. Since Warsh took office, the 10-year US Treasury yield has continued to climb, nearing recent highs. This market-driven "bond vigilante" behavior indicates that investors do not fully believe Warsh can contain inflation—on the contrary, they are expressing concern about persistently high inflation by pushing up long-term yields. If Warsh leans dovish at the June meeting, yields could rise further; if he pivots hawkish, it would run directly counter to the easing path Trump expects. Whichever path he takes, it will exert significant pressure on risk assets.
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