What to Expect From the First Meeting Under New Leadership
The central question heading into this Federal Open Market Committee (FOMC) decision is what tone a new Fed chair, Warsh, will strike at his very first meeting. The reasonable expectation is restraint: a first meeting is not the place to "start off with a big boom." Rather than a dramatic policy shift, the most likely outcome is a balanced acknowledgement of inflation. Helping the Fed's position is the recent drop in oil prices to roughly $75–76 — the lowest levels since around February or March — which makes the inflation picture easier to manage and reduces pressure for aggressive action.
There is a notable timing element as well: a memorandum of understanding (an MOU) happened to precede this first Warsh-led FOMC meeting. While anything is possible, a hawkish surprise is not the base case. The one wildcard is whether Warsh chooses to use the meeting to make a statement — for instance, by declaring the independence of the Fed and reaffirming its dual mandate (price stability and maximum employment). How aggressive he wants to be on that front is genuinely unknown, but given that it is his debut, the safest assumption is a fairly balanced presentation. As the new figure at the helm, he likely does not want to be too controversial straight out of the gate.
The Interest Rate Outlook
On the actual policy decision, no move is expected at this meeting, and that no-change outcome is already largely baked into market expectations — so forecasting a hold is not going out on a limb. The broader view extends further: the Fed funds rate is likely to stay unchanged over the rest of the year, with no additional movement anticipated.
The Communication Strategy Wildcard
The more interesting dimension of this meeting may be communication rather than rates. Warsh has been openly critical of how much the Fed has spoken in the past, arguing that excessive communication ties the committee's hands on policy and limits the kind of open discussion he would prefer. Because of that track record, it would not be surprising to hear him address the Fed's communication strategy directly.
Several specific possibilities are worth watching:
- The Summary of Economic Projections (SEP) and the "dots plot." Warsh could signal changes here, given his stated belief that the Fed communicates too much.
- Press conferences after every meeting. There is a real chance he raises the idea of removing the press conference that currently follows each meeting.
- Whether Warsh submits his own dot. A key thing to watch is whether the new chair actually puts a dot down in the dots plot at all. Declining to do so would itself be a statement consistent with his view that over-communication constrains policy.
These signals matter disproportionately because they could shift the entire narrative for the Fed going forward. Markets have been heavily conditioned to expect the Fed to communicate in a particular, predictable way, so any change to that framework would be significant. There is even a historical pattern around first Fed days for new chairs: for Bernanke, Yellen, and Powell, the S&P 500 traded higher heading into the 2:00 p.m. rate decision all three times — only to finish red on the day each time. The open question is whether Warsh can break that streak and produce the first green close.
Why Yields May Have a Floor
A central point on fixed income is that the Fed's words this afternoon may matter less for yields than many assume, because so many other forces are keeping longer-term rates elevated. While the Fed obviously matters, the direction of longer-term interest rates suggests there is probably a floor on how low they can go. Several reasons support that view:
- Sticky inflation. Inflation has run above the Fed's target for years and remains sticky, limiting how far yields can fall.
- Geopolitical uncertainty. There is an open question around whether the Iranian deal sticks or falls apart, and that uncertainty feeds directly into the short-term outlook for inflation.
- A higher term premium. Broad uncertainty and instability in the market push the term premium higher, which is another reason yields might not move much lower.
- A Fed on hold amid a resilient economy. With the labor market coming in stronger than expected — or at least showing some stabilization — and inflation ticking a bit higher, the Fed is likely to stay on hold.
The consumer picture reinforces this. Retail sales came in higher across the board, indicating the consumer is in relatively good shape, which should feed through into GDP. Notably, even though gas prices are higher right now, that is not currently a meaningful pinch on consumer spending. Taken together, these factors are supportive of higher longer-term yields — or at minimum, they establish a floor on how much lower yields can realistically go.
The Rotation Beneath the Surface
Markets have shown a striking broadening of strength. The prior session produced an all-time-high close for the Industrials, alongside all-time highs for the Russell 2000, the S&P equal weight, and the Dow Jones. By overbought readings, the financial sector has moved into the top spot, with Industrials the next most overbought — a sign of how powerful the broadening trade has become.
A structural shift helps explain this. The Russell 2000 used to mimic the KRE (the regional banks index) and was therefore highly interest-rate sensitive. Today, the composition of the Russell has changed: Industrials and technology are now powering it higher, and the historical correlation between the KRE and the Russell has at least partly broken down.
Underpinning much of this strength is the AI infrastructure buildout, which is driving demand across electrical equipment and related cyclicals. A concrete example came from Jabil, which reported that morning, hit an all-time high, gapped up, and beat-and-raised — another read-through confirming that AI infrastructure demand is still very much intact and continuing to power Industrials and, to some extent, financials. Interest rates are playing into the move as well, but the AI theme is a major driver in its own right.
Volatility and Speculation Under the Hood
Beneath the calm surface of broad indices sits considerable single-stock turbulence. The gap between single-stock volatility and the VIX hit a record high earlier in the month — an unusually large disparity. Within the semiconductor space ("the socks"), daily moves of six, eight, or nine percent have been occurring, illustrating how much volatility is concentrated in the high-beta corners of the market: chips, infrastructure, and technology.
Speculation remains heavy. SpaceX-related activity is one likely contributor: it was the most heavily traded stock by volume in the prior session and the third most active option-traded name. The $380 strike expiring the next day saw 32,000 contracts trade in a single session. This concentration of speculative activity in high-beta tech is described as "a whole 'nother playground" relative to the broader market. Still, it is encouraging to see more traditional cyclicals advancing to fresh highs alongside the speculative froth — a sign that the rally has real breadth, not just narrow leadership.
Key Questions Raised and Answered
- What should be expected this afternoon from the rate decision? No rate move; a hold is the base case and is already priced in, with rates likely unchanged for the rest of the year.
- Will there be a hawkish surprise from the new chair? Probably not — a balanced acknowledgement of inflation is most likely at a first meeting, though a statement on Fed independence and the dual mandate is possible.
- What might Warsh say about communication? He may address the SEP/dots plot, potentially remove the post-meeting press conferences, and may even decline to submit his own dot, consistent with his belief the Fed has communicated too much.
- How much does what Warsh says matter for yields right now? Less than one might think, because sticky inflation, geopolitical uncertainty, a higher term premium, a resilient labor market, and a strong consumer all establish a floor under longer-term yields.
- Are higher gas prices hurting the consumer? No — despite higher gas prices, the consumer remains in relatively good shape, as shown by retail sales beating across the board.
- Is the AI infrastructure trade still intact? Yes — confirmed by fresh highs and strong earnings such as Jabil's beat-and-raise, even as significant under-the-surface volatility persists in chips and high-beta tech.
