Donald Trump got what he wanted: Jerome Powell stepped down as Fed Chair and was replaced by Kevin Warsh. Yet the Fed's stance hasn't changed overnight. In fact, it seems we may have ended up with someone hawkish, which might not be good news for the S&P 500, Nasdaq, and Dow Jones.
And it's not that rates were left unchanged at 3.5%–3.75%, but rather that Warsh placed particular emphasis on inflation, stressing that bringing it back to the 2% target remains a top priority, thus signaling a tougher stance than many had expected.
The updated projections don't offer much reason for optimism either: the inflation forecast was raised from 2.7% to 3.6%, while core inflation expectations increased from 2.7% to 3.3%. For 2027, core inflation was also revised higher, from 2.2% to 2.5%.
As for interest rates, the expected policy rate for 2026 was raised from 3.4% to 3.8%, and the 2027 projection was raised from 3.1% to 3.6%, with 9 of the 18 voting members now expecting another rate hike this year.
Markets, in turn, according to the CME FedWatch Tool, now see just a 0.7% probability of a rate cut by June 2026, while the odds of another rate hike are almost 90%.
Can the reopening of the Strait of Hormuz solve the inflation problem?
Since a 3.8% jump in energy prices accounted for more than 40% of April's CPI increase, cheaper energy would help bring inflation closer to the Fed's target. The good news is that gasoline prices have eased on positive developments in the Middle East.
The thing is that despite apparent progress in negotiations between the US and Iran, it's still too early to say the conflict is truly over.
On the other hand, many countries are looking to build larger oil and gas stockpiles. According to Reuters, new energy-security plans could require around 500 million additional barrels of strategic reserves. Combined with the need to refill inventories already drawn down, total additional demand could reach as much as 1 billion barrels.
The conclusion?
Changing the head of the Fed has done little to change the course of U.S. monetary policy. That's not great news for heavily indebted companies, but an inflation-focused Fed helps preserve confidence in the U.S. financial system.