Wosh's debut this week encountered a "hellish start": bond market pricing in advance rate hikes, Trump calling for rate cuts.

The new Federal Reserve Chairman, Kevin Warsh, who has only been in office for three weeks, is about to experience the most dramatic and high-risk debut of his career and even in modern central banking history. In the early hours of June 18th, Beijing time, this new head of the Federal Reserve will preside over his first Federal Open Market Committee (FOMC) meeting since taking office and hold his first policy press conference. The meeting is expected to maintain the federal fund rate target range of 3.50% to 3.75%, but with inflation returning to 4%, the market beginning to price in rate hikes by the end of the year, Trump continuing to pressure for rate cuts, and the most severe internal division within the FOMC in nearly 34 years, the decision to "stand still" itself is as important as the signal Warsh will send. Market participants will scrutinize every word of the FOMC statement and every word Warsh says at the press conferencethey will be key clues to determining where this former hawkish director, now advocating "practical monetarism," will lead U.S. monetary policy. Divisive inflation signals: overall inflation hits a three-year high, while core increase unexpectedly mild Data released by the U.S. Bureau of Labor Statistics on June 10th set the stage for this major test. Consumer Price Index (CPI) for May 2026 rose by 4.2% year-on-year, reaching the highest level since April 2023, marking the third consecutive month of increase and crossing the 4% mark for the first time. Looking at specific numbers, the CPI for May increased by 0.5% month-on-month, a slight decrease from April's 0.6%; excluding the volatile categories of food and energy, the core CPI rose by 2.9% year-on-year and 0.2% month-on-month, lower than the market's expectation of 0.3%. The U.S. saw "overall hot, core soft" inflation in May. Energy played a major role in driving up the overall inflation, with energy contributing 1.55 percentage points to the CPI year-on-year increase, acting as the primary driver. Fuel prices surged, with gasoline prices rising by more than 40% year-on-year, and gasoline prices in May saw a 7% month-on-month increase. The surge in energy prices was driven by continuing geopolitical tensions in the Middle East. International Brent crude oil prices fluctuated significantly between $95 and $110 per barrel in May, with the main factor being the disruption of shipping in the Strait of Hormuz. Even after excluding the supply-side shocks, internal CPI increases in the U.S. did not show significant strengthening, as energy price increases did not spread widely to other areas, and core inflation remained relatively mild, providing the Federal Reserve with "watch and wait" space. In addition, the PCE inflation indicator, which the Federal Reserve is more concerned about, rose by 3.3% year-on-year in April, with only a 0.2% increase month-on-month, keeping a moderate growth rate. The main driver of inflation was external supply shocks rather than overheating domestic demand, suggesting that rate hikes may not be the appropriate response, giving the Federal Reserve more policy flexibility. Political storm: Trump's "complete independence" statement and continuous pressure tug-of-war Warsh's appointment as Federal Reserve chairman itself marked a politically colored start. On May 22, Trump held Warsh's swearing-in ceremony in the East Room of the White Housea move that marked the first time in nearly 40 years that a Federal Reserve chairman had been sworn in at the White House. The last time this happened was in 1987 when President Reagan appointed Greenspan as chairman, coinciding with a similar inflation issue facing the Federal Reserve. During the swearing-in ceremony, Trump's statement to Warsh was delicate: "I am serious, and I hope that Kevin can be completely independent. Don't look at me, don't look at anyone, just do your thing and do it well." At the same time, Trump also emphasized, "we hope to curb inflation, but not to hinder economic prosperity," and explicitly stated his desire for lower interest rates. In late May, during Warsh's confirmation hearing, Warsh vehemently stated, "I will never be a puppet of the White House." However, on June 8thjust a week before the FOMC meetingTrump once again publicly stated that if the Federal Reserve chooses to raise rates, it would be a "mistake." He said, "We should actually lower rates," and "When a country's economy is doing well, it should not be punished immediately by raising rates." James Klaus, economist at Anderson Economic Group and former vice chairman of the Federal Reserve's monetary affairs department, commented, "A new Federal Reserve chairman has never faced such a tricky and blatant direct conflict between the White House's priorities and the direction of the real economy as they do today. He must quickly prove to the market that he understands the cold signal of the upcoming data, rather than the political signal." The intertwining of these conflicting signalsTrump's simultaneous claims of respecting the independence of the Federal Reserve and his strong desire for rate cutsmakes the game Warsh faces more complex than any of his predecessors. Additionally, the internal division within the Federal Reserve is becoming increasingly visible. Minutes from the April meeting showed that a large number of policymakers had warned that if inflation continues to rise, they hope to completely abandon their previous dovish stance and even prepare to resume rate hikes before the end of the year. In the most recent vote, three Federal Reserve officials directly voted against the policy stance for not being hawkish enough. Bond market in full retreat: yield curve inversion pressures Federal Reserve to "hike rates" Expectations of rate cuts before Warsh took office have been completely shattered over the past month. The latest survey shows that the expected timing for the Federal Reserve to cut rates has been greatly delayed to mid-2027. Most respondents expect the first rate cut to possibly occur in June 2027, followed by another cut in December of the same year, bringing the benchmark rate range down to 3% to 3.25%. What is even more concerning is the repricing of the path to rate hikes in the market. The CME Group's "FedWatch" tool shows that the probability of the Federal Reserve raising rates by a cumulative 25 basis points by July has reached 7.4%. Goldman Sachs' previous data forecast also shows that the likelihood of the Federal Reserve raising rates in 2026 has soared from around 12% before the U.S.-Iran conflict broke out to 45%. The bond market is sending clearer signals: the yield on two-year U.S. Treasury notes has risen to over 4%, significantly higher than the Federal Reserve's policy rate; the yield on 30-year bonds briefly touched 5.19% last month, just one step away from the high in 2007. The mainstream view on Wall Street is that these two indicators are sending the market the same signalthe need for rates to continue to rise. Despite this, Warsh's decision on whether to raise rates still faces many constraints. Ten arguments supporting no rate hikes include: moderate core inflation month-on-month, the higher-than-expected May nonfarm payroll figures mainly due to short-term trends rather than overall economic overheating, the rise in oil prices being a supply-side shock where raising rates could trigger stagflation risks, and the international oil price fall after the U.S.-Iran memorandum of understanding was reached, among others. The European Central Bank has already raised rates, and the Bank of Japan is expected to follow suit, so the differing directions of central banks globally are increasing the differentiation of monetary policy, making the Federal Reserve's policy decisions face a more complex external environment. Divergence between short-term yields and policy rates, Warsh confronts the challenge of the neutral rate guidance Since March this year, the yield on two-year U.S. Treasury bonds has consistently been higher than the upper limit of the Federal Reserve's policy rate, with a premium range of around 40 to 50 basis points. This is the market's way of showing that policy is no longer restrictive and may even be too loose. The divergence between short-term U.S. Treasury bond yields and policy rates once again reminds the market that Federal Reserve policy often lags behind market trends. The rate hike cycle at the end of 2021 and early 2022 exhibited similar characteristics of leading the market. Currently, investors and analysts are beginning to focus on the Federal Reserve's long-term "neutral rate" benchmarkwhich is the theoretical level of borrowing costs that neither stimulates nor restrains economic growth. The FOMC forecasted a long-term neutral rate of around 3.1% in March. Analysts point out that the continued AI capital expenditure boom is pushing the neutral rate higher by increasing capital demand. The current market trading prices imply a neutral rate adjusted for inflation of around 1.8%, significantly higher than the Federal Reserve's estimated median of 1.1% adjusted for inflation. This is a "landmine" that Warsh must carefully navigate during his first press conference. If he believes the neutral rate is higher than the committee's estimate, then maintaining the current rates unchanged would mean that the policy is no longer restrictive, and rate hikes may be necessary. If he leans towards maintaining the committee's lower estimate, he must confront the risks of continued bond market increases and rising inflation expectations. Anshul Pradhan, head of the Barclays Bank interest rate strategy team, pointed out that the debate on the acceleration of labor market demand and monetary policy tightening issues may drive an upward revision of the neutral rate assumption, affecting the entire yield curve, not just short-term rates. Kevin Flanagan, Director of Investment Strategy at WisdomTree, believes that determining the appropriate level of the neutral rate is crucial for Warsh to formulate policy, as his predecessor, Powell, was uncertain about the 3.5% neutral rate.