Fed May Resume Rate Hikes in September: Full Analysis of Warsh’s Hawkish Debut, Are US Stocks a Risk or Opportunity in the Second Half

1. Core Assessment: An Overestimated Rate Hike Panic

Since Trump appointed Kevin Warsh to take the helm at the Federal Reserve, the market's primary narrative had been easing and rate cuts. However, the first interest rate meeting Warsh chaired after taking office delivered a result that caught the market off guard—the Federal Open Market Committee (FOMC) revised its median forecast for the federal funds rate at the end of 2026 upward from 3.4% in March to 3.8%, effectively flipping the policy trajectory from 'further rate cuts' to 'another 25-basis-point hike.' The interest rate futures market quickly followed suit, pricing in the September meeting as the first potential window for this hike cycle.

The core assessment of this article is that the market's current pricing of the Fed's rate hike path is highly likely too hawkish. There are two reasons. First, from the forward-looking trajectory of inflation, the energy factors driving this round of inflation spikes are subsiding as tensions in the Middle East ease, and long-term inflation expectations have begun to roll back. Second, regarding employment and corporate fundamentals, the current wave of layoffs, primarily driven by artificial intelligence (AI), is essentially a structural adjustment aimed at expanding corporate profit margins rather than a precursor to a collapse in demand; corporate earnings in US equities remain solid. Consequently, even if the Fed resumes rate hikes in September, its impact on the market should be viewed as a short-term disturbance rather than a systemic risk. However, it must be emphasized that this bullish outlook relies on several premises, and this article will outline specific signals in the final section that could invalidate this assessment.

2. Meeting Facts: Warsh's Debut and the Historic Flip of the Dot Plot

To clarify whether this shift represents a risk or an opportunity, we must first look at the objective facts. Kevin Warsh was officially sworn in as the 17th Chair of the Federal Reserve on May 22, 2026. Warsh is no novice to central banking—he served as a Federal Reserve Governor from 2006 to 2011, making him one of the youngest governors at the time. He also worked on Wall Street and served as a fellow at the Hoover Institution, accumulating deep expertise in both monetary policy and financial markets. The two-day meeting on June 16–17 was the first FOMC meeting he chaired since taking office.

The first fact from this meeting is that the Federal Reserve decided to keep the federal funds rate unchanged in the 3.50% to 3.75% range. On the surface, this was a pause, but the vote was a unanimous 12-0. Contrasted with the split 8-4 decision at the previous meeting (April 29) chaired by Jerome Powell—where one member advocated for a rate cut and three opposed easing-biased language—this unanimous vote in itself sends a strong signal that the new Chair unified internal opinions within a very short period of time.

The second fact emerged in the official statement. The length of this statement was drastically cut to less than half of its usual size, stripping out the forward guidance that the market had long relied on, as well as all dovish language hinting at potential future rate cuts. According to Warsh himself, he wants future statements to be shorter and more direct, offering only the facts themselves.

What truly ignited market sentiment was the subsequent release of the interest rate dot plot and the Summary of Economic Projections (SEP). As mentioned earlier, the median rate forecast for the end of 2026 jumped from 3.4% to 3.8%. Among the 18 policymakers who submitted forecasts, 9 believed that at least one rate hike would be needed this year, with 6 projecting two hikes, while only one member still expected a rate cut. Meanwhile, 17 out of the 18 members saw inflation risks tilted to the upside. Other revisions in the SEP similarly pointed to a hawkish stance: the Fed revised its 2026 Personal Consumption Expenditures (PCE) inflation forecast upward to 3.6% and core PCE to 3.3%, while lowering its full-year GDP growth forecast to 2.2%.

One detail worth noting is that Warsh himself did not submit a personal rate projection. This seemingly procedural anomaly actually relates to the new Chair's fundamental vision for future communication mechanisms.

3. The Root of the Hawkish Turn: Energy Shocks and Warsh's Institutional Revolution

This hawkish pivot did not emerge out of thin air. Its direct catalyst was the renewed tension in the Middle East that drove up global energy prices, pushing the US Consumer Price Index (CPI) in May up to 4.2% year-on-year—a three-year high—with core CPI reaching 2.9%. It can be said that the Federal Reserve was backed into a corner by a wave of supply-side inflation. Notably, with a ceasefire reached between the US and Iran and oil prices falling significantly, the peak of this supply shock may have passed; yet, before this inflationary storm receded, it had already precipitated a 'regime change' within the Fed.

Understanding Warsh's motivation for not submitting a personal dot is key to understanding the behavioral model of the new Fed. This move resembles a deliberate posture by the new Chair rather than a mere procedural oversight. Throughout his academic and policy-commentary career, Warsh has consistently criticized the Fed's forward guidance, arguing that this practice ties central bank decisions to market expectations, making policy errors more likely. The institutional reform he is pushing is to return the Fed to a restrained style of 'stating facts only, with no pre-commitments.' To this end, upon taking office, he established five special working groups to review the current communication mechanism, data interpretation, and the root causes of inflation, respectively. At the same time, he reaffirmed the 2% inflation target and expressed a tendency to 'look through' supply-shock-driven inflation, alongside his view that AI will usher in a productivity-driven structural deflation. On the balance-sheet front, Warsh faces a massive portfolio of about $6.8 trillion, and his approach to quantitative tightening (QT) and liquidity management will also be a key focus of future observation.

So, what does this 'exit from expectation management' mean for asset prices? This article leans toward this interpretation: the sharp upward revision of the dot plot represents the Fed actively steering market expectations upward, rather than being dragged along by market sentiment. More precisely, the Fed is exiting its role of managing market expectations—it will no longer endorse future paths or actively correct market deviations, but will hand pricing power back to the market itself. It is important to clarify that 'exiting expectation management' is not the same as 'following the market': this dot plot is precisely a case of the Fed proactively driving the market to reprice toward rate hikes, rather than passively reacting. The immediate consequence of this shift is that, once the market loses the anchor of forward guidance, the perceived weight of every newly released CPI data point and nonfarm payrolls report will be significantly magnified. In other words, asset volatility around data releases is bound to be more intense than in the past. This provides a crucial backdrop for understanding the trajectory of US equities in the second half of the year.

Furthermore, this policy pivot cannot be decoupled from the political context. Trump's nomination of Warsh was originally intended to push for rate cuts to lower borrowing costs, while Warsh has repeatedly emphasized in public that the Federal Reserve will maintain strict independence. With political demands pointing to cuts and the dot plot pointing to hikes, this tension itself serves as a window for observing the Fed's future policy independence.

4. Market Pricing and Two Independent Lines of Challenge

After clarifying the shift in the Fed's behavioral patterns, we must examine current market pricing pragmatically. The interest rate futures market is currently pricing in one 25-basis-point rate hike by the Fed this year, with the September meeting being the first potential trigger point, and expects another hike in 2027. According to the CME FedWatch Tool, the probabilities of keeping rates unchanged at the June and July meetings both remain high (near 97% for the June meeting). Meanwhile, the cumulative probability of at least one hike by the end of 2026 has climbed from nearly zero at the start of the year to about 70%. This pricing, which leans heavily hawkish, in a way validates this article's judgment: the market's rate-hike panic has likely gone too far. It should be noted that the specific probability of a hike at the September meeting will continue to fluctuate with subsequent data, and investors should rely on real-time data at the time of publication.

This article challenges this hawkish pricing from two independent lines of logic.

The first line of logic concerns the forward-looking path of inflation. Despite poor previous data, with the US-Iran ceasefire and crude oil prices retreating from their peaks, the long-term inflation expectations published by the University of Michigan have fallen significantly from 3.9% to 3.4%. Coupled with the fact that the one-off base effect of last year's high tariffs will theoretically fade out of the statistical calculation in the second half of the year, multiple forward indicators collectively suggest that peak inflationary pressures are passing. However, this article must honestly point out the weakest link in this assessment—the stickiness of core inflation. Falling oil prices only drag down headline CPI, while current core CPI is still stuck at 2.9%, and the Fed's forecast for full-year core PCE has also been revised up to 3.3%. As long as core inflation lingers near 3% in the coming months, the Fed's justification for rate hikes remains intact. Therefore, the key to subsequent observations is whether core inflation can achieve a substantial decline alongside the drop in overall oil prices.

The second line of logic is the foggy labor market. Current employment data presents an intriguing dichotomy: on one hand, corporate layoff announcements are worsening—in May alone, US corporate job cuts surged to 97,000, with tech accounting for about 38,000, marking the worst single-month record in nearly two years, and for three consecutive months, the top reason cited by companies for layoffs has been AI transition. On the other hand, hard macroeconomic data remains exceptionally robust—weekly initial jobless claims are firmly anchored in the low range of 210,000 to 220,000, nonfarm payrolls added 172,000 jobs in May, and the overall unemployment rate of 4.3% has barely moved over the past year. Objectively speaking, this hard employment data currently supports the case for rate hikes, posing a challenge to this article's expectation that the labor market will weaken.

However, there is an important cognitive blind spot beneath this dichotomy. From the perspective of long-term stock ownership in US equities, the current loosening of the labor market should not be interpreted through the traditional lens of a 'wave of unemployment' or a 'demand collapse.' This round of tech layoffs is occurring alongside record corporate profits and record capital expenditure. According to aggregations by Goldman Sachs and other institutions, the combined CapEx of the four cloud computing giants—Amazon, Microsoft, Alphabet, and Meta—is expected to surge to between $700 billion and $725 billion in 2026, nearly double last year's level. This indicates that companies are not laying off workers due to cash constraints, but are instead undergoing structural adjustments. Some qualitative research also points out that the most severe potential contractions are mainly concentrated in youth and entry-level tech positions. In other words, companies are leveraging the high productivity of AI to freeze entry-level hiring, thereby expanding profit margins. While this is certainly bad news for recent graduates, it is a positive for corporate earnings per share (EPS) and long-term inflationary pressures—perfectly validating Warsh's long-held core view that the proliferation of AI will bring productivity-driven structural deflation to the economy.

5. Transmission to US Equities: The Tug-of-War Between Valuation and Earnings

Having understood how companies are using AI to expand profit margins, we can integrate this fundamental resilience into the trading framework for US equities in the second half of the year. Unsurprisingly, the market ahead will descend into a tug-of-war between high discount rates and strong corporate earnings.

The bearish side lies in the discount rate. If the Federal Reserve maintains high interest rates or even resumes rate hikes in September, it means discount rates will remain elevated for a prolonged period, which will inevitably suppress high-valuation, long-duration tech growth stocks in the short term. The market reaction on the day of the interest rate meeting was a classic example: the S&P 500 fell about 1.2% at the close, the Dow Jones Industrial Average dropped about 500 points, and the Nasdaq Composite shed over 1.3%. At the same time, the two-year US Treasury yield jumped about 11 basis points, and long-term yields, including the ten-year, climbed in tandem. This collective retreat is a textbook illustration of the short-term impact of rate-hike expectations on high-valuation sectors. The bullish side, however, lies in earnings. The EPS growth of mega-cap tech stocks driven by the AI CapEx boom is real. This brings us to the core question for US equities in the second half of the year: can the growth rate of corporate earnings outpace the valuation compression caused by rising discount rates?

Regarding this core question, looking at a longer time horizon, this article leans toward the view that there is no need for excessive panic. The key lies in the fundamental difference between this round of rate hikes and that of 2022. In 2022, the Federal Reserve was confronted with rampant CPI inflation reaching as high as 9%, forcing it into an extremely passive state where it raised rates sharply and consecutively, with the entire tightening cycle accumulating 525 basis points. Conversely, if rate hikes are resumed this time, policymakers are not engaging in panic-driven tightening to extinguish runaway inflation. Instead, against the backdrop of a still-resilient economy, they intend to claw back the three 'insurance' rate cuts from the second half of 2025, which totaled 75 basis points. For the calendar year 2026, the rate hike implied by the dot plot is expected to be just 25 basis points. The former was a systemic threat capable of destroying market structures; the latter is a policy correction that the market is fully capable of digesting. This qualitative distinction is the fundamental dividing line for judging whether a pullback is a risk or an opportunity.

6. Sector Divergence and Stock-Picking Logic

If the high-interest-rate environment persists longer than expected, it will inevitably lead to significant sector divergence within US equities, and recent consumption data happens to provide clear clues for stock selection.

On the surface, May retail sales grew 0.9% month-on-month, beating expectations with broad-based growth. Yet, peeling back this layer, the pillars supporting consumption are actually quite fragile: the benefits of previous tax refunds are fading, households are drawing down existing savings at an accelerated pace, and credit card debt continues to climb, leaving real disposable income in April down 1% year-on-year. This pressure on real purchasing power has translated into clear consumer downtrading—private labels now account for 49% of apparel sales; while total sales value edged up 1.2% due to higher prices, the actual volume of items purchased dropped sharply by 4.3%. The University of Michigan Consumer Sentiment Index fell 13% from January this year and is 19% lower than the same period last year, with respondents generally listing inflation as their top concern, ahead of unemployment.

This reality of consumer downtrading can be directly translated into a stock-picking logic for the second half of the year. This article believes that under these conditions, the assets that can buck the trend and benefit will be highly concentrated in discount retail giants like Walmart and Costco, which focus on high value-for-money, as well as leading companies specializing in private labels. Meanwhile, prolonged wide interest margins will continue to benefit the net interest income of large financial stocks. Conversely, awkwardly positioned low-end discretionary consumer goods, big-ticket durables reliant on high financing costs, small-cap stocks that mainly depend on floating-rate debt to sustain operations, and frothy tech stocks that remain unprofitable will bear the brunt of the high-rate pressure.

Following the logic of high discount rates, we must also re-examine the internal structure of the AI sector, which is currently drawing the most attention. Let us first clarify our stance: we remain highly bullish on AI as a long-term trend, and this has not changed; however, 'being bullish on the AI industry' and 'being bullish on all current AI concept stocks' are two different things operationally. In an environment where the Fed is in no rush to cut rates and discount rates remain high, this article leans toward shifting allocations more toward AI companies with relatively reasonable valuations. The underlying logic is that high-flying market darlings enjoying astronomical valuations have expensive share prices that mostly bet on earnings far out in the future. These are high-duration assets, and if discount rates fail to come down, their P/E ratios will be compressed most severely, making them the most vulnerable in a pullback. Conversely, companies whose earnings have already materialized on their balance sheets, with robust cash flows and relatively reasonable valuations, possess a double safety cushion of earnings growth and valuation sanity, giving them significantly stronger defensive power during comparable pullbacks. Therefore, in the current high-interest-rate environment, the scales tilt toward the latter; only when the rate-cut cycle officially begins and discount rates are decisively on a downward path will high-valuation, high-beta stocks regain their edge.

7. Scenario Divergence and Three Key Monitoring Sentinels

At this point, we must draw a clear line between the base case and the bear case—which is also where this article needs to maintain the utmost intellectual honesty and where our thesis is most vulnerable to being proven wrong.

In the base-case scenario, even if the Fed raises rates by another 25 to 50 basis points, it still essentially falls under the category of 'hawkish tightening to claw back insurance cuts.' Under this scenario, broad-market EPS is sufficient to support fundamentals, meaning overall downside is limited, and the market's panic-driven pullbacks represent positioning opportunities in the long run. However, it must be emphasized that this 'opportunity' is highly tiered in execution, consistent with the choices discussed within the AI sector: opportunities will be highly concentrated in the segment where earnings have materialized and valuations are reasonable. Meanwhile, high-valuation tech stocks that rely purely on P/E multiple expansion will remain suppressed by high discount rates in the short term, and their beta can only be unlocked once genuine signs of a pivot in the interest rate environment emerge. Therefore, pullbacks in the base case by no means imply that one should buy the dip indiscriminately.

Once the macro environment slides into a bear-case scenario, the pricing logic of the entire market will face severe challenges. If subsequent data reveals stubborn stickiness in core inflation, while long-term inflation expectations spin out of control and become unanchored, the Fed's actions will be forced to transition from proactively 'clawing back insurance cuts' to passively 'chasing down inflation.' At that point, the market will face sharp P/E compression similar to what occurred in 2022, and any pullback will cease to be a buying opportunity. This article must honestly add another point: in a true risk-off environment, correlations across different assets tend to converge toward 1; even defensive sectors with lower valuations and robust earnings will decline alongside the rest, at best suffering relatively smaller losses. Investors must not mistake 'low valuation' for a safe haven completely insulated from the shock.

The reason this inflection point is particularly relevant now is that current market expectations are actually quite fragile. In March of this year, the one-year inflation expectation was still holding at 3.8%, but after a single oil price shock in the Middle East, it was pushed up to 4.8% within a month. This means that while the anchor of long-term expectations remains, its chain has clearly loosened. Warsh is betting that the Fed can 'look through' these short-term supply-side shocks, but our real concern is that if the market is forced to repeatedly 'look through' them, it may eventually become reality, leading to a substantive de-anchoring of inflation expectations. These preconditions must be clearly understood when making asset allocations.

To avoid losing one's bearings on this divided path, investors do not need to blindly bet on the outcomes of Fed meetings. Instead, they can anchor their independent judgments to three core monitoring sentinels. First, whether core CPI and core PCE can decline in tandem with headline oil prices; second, whether the University of Michigan's long-term inflation expectations will once again climb out of control; third, whether the overall unemployment rate will break its stability of the past year and begin to rise from 4.3%. The beauty of these three indicators lies in their dual-purpose nature: they serve as directional indicators for determining 'base case versus bear case,' while also acting as precise triggers for when to shift allocations within the AI sector from defensive, low-valuation stocks back to high-beta, high-valuation ones. When core inflation steadily declines, long-term expectations remain firmly anchored, and the labor market avoids a collapse in employment, the macro implication is a clear path toward future rate cuts and falling discount rates—the exact moment for high-valuation, long-duration growth stocks to reclaim dominance.

Conclusion: The Bottom-Line Thinking for Long-Term Ownership of US Equities

Taking everything into account, the true long-term historical significance of the new Fed Chair's debut extends far beyond whether there will be an extra 25-basis-point hike in September. This article interprets it as the Federal Reserve officially announcing its exit from the role of 'babysitting and managing market expectations.' In the financial markets of tomorrow, the data will speak for itself, and the resulting volatility will be significantly amplified compared to the past. The path forward for assets must be independently judged by investors themselves.

Building on this understanding, we choose to maintain a long-term bullish outlook on the overall trajectory of US equities for the second half of the year, because this is fundamentally a hawkish tightening against a backdrop of economic resilience, and the super-normal earnings of large enterprises are fully capable of supporting the market's framework. However, this article has also unreservedly listed all the core signals that could flip this judgment to bearish. Rather than wasting energy chasing daily market rumors and betting on the Fed's next move, it is far better to keep a close eye on the two most honest sentinels: core inflation and the labor market. Only when the winds shift for these two sentinels will the script for US equities undergo a substantive reversal.