Wall Street Calls Fed 'Much More Hawkish Than Expected' as Dot Plot Pivots Toward Rate Hikes

Following the much more hawkish-than-expected outcome of the Federal Open Market Committee (FOMC) meeting—the first since U.S. Federal Reserve Chair Kevin Warsh took office—Wall Street reacted with skepticism, with some saying, "He is not the person the market was hoping for."

Bob Michele, Chief Investment Officer (CIO) and Head of Global Fixed Income at JPMorgan Asset Management, appeared on Bloomberg TV on Wednesday, June 17, local time, stating, "Half of the committee members are projecting a rate hike within this year. This is a strong warning signal to the market," adding, "The Fed is preparing to raise rates."

Michele diagnosed that the trauma of the 2022 inflation crisis still lingers within the Fed.

"The committee members are still scarred by that experience," he said, adding, "As they see the bond market reacting positively to other central banks raising rates, the Fed is also reconsidering its stance."

He also remarked that Chair Warsh is "destined to disappoint" President Trump.

Kay Haigh, CIO of Global Fixed Income and Liquidity at Goldman Sachs Asset Management, also assessed, "This meeting confirmed that the Fed's hawkish pivot is not simply due to rising energy prices." He added, "Despite the recent decline in oil prices, half of the members expect a rate hike within this year, which reflects the robust labor market and inflation data."

Jeffrey Gundlach, CEO of DoubleLine Capital, who is known on Wall Street as the "New Bond King," said in an interview with CNBC, "Chair Warsh has declared that he will firmly deliver price stability. The 'easy money policy' that many had expected from him as recently as the first quarter of this year will no longer exist."

However, he noted that this hawkish stance has increased the attractiveness of long-term government bonds.

"If price stability is achieved, there is more reason to hold long-term Treasury bonds," Gundlach said, interpreting that "Chair Warsh has already declared that he will be judged a failure if he cannot tame inflation."

During his press conference, Chair Warsh stated, "The Fed will deliver price stability," adding, "This commitment is strong, unanimous, and clear. We will now correct the important message we missed for five years."

The market reaction was immediate.

The Dow Jones Industrial Average closed down 0.98%, the S&P 500 Index fell 1.21%, and the Nasdaq Composite Index declined 1.34%.

The yield on the policy-sensitive 2-year U.S. Treasury note surged by 16 basis points (1 bp = 0.01 percentage point) to 4.21%.

Claudia Sahm, Chief Economist at New Century Advisors, explained, "The market reaction is due to the dot plot coming out much more hawkish than expected," adding, "The inflation landscape has changed significantly."

According to the CME Group's FedWatch Tool, traders are pricing in a 60.7% probability of an interest rate hike in October.

Prior to this meeting, the market had anticipated the timing of a rate hike to be in December.

However, there are also counterarguments.

Ellen Zentner, Chief Strategist at Morgan Stanley Wealth Management, said on Fox Business, "The Fed's next move is still likely to be a rate cut, but it will take time for inflation to come down sufficiently." She anticipated that changes under Chair Warsh's leadership would appear in structural reforms before interest rates.

Michael Feroli, Chief U.S. Economist at JPMorgan, also suggested that the market is overreacting to the hawkish side, predicting that the Fed will keep rates on hold this year and forecasting the first rate hike to occur in September 2027.

(Photo: AP, Yonhap News)
※ Please note: This article was translated by AI and may contain errors.