Warsh's Hawkish Fed Debut Lifts the Dollar, Unsettles Risk Assets

What the market welcomed was not a rate move – the Federal Open Market Committee (FOMC) held – but a new chair displaying autonomy over decision-making and commitment to the Fed's mandate. The opening statement read that "members of the FOMC are unambiguous and unanimous: This Committee will deliver price stability."

That reassurance was not a given. A couple of months ago, Kevin Warsh, then soon-to-be-confirmed Fed chair, used his testimony before the Senate Committee on Banking to try to assure members and the public that he would not be Trump's puppet. The president had been pressuring the Fed to lower rates and loosen monetary policy, which naturally raised questions about the independence of Trump's nominee, especially given his history of changing his policy stance along with the political winds when he served as governor of the Fed. As with every new chair, the market was about to test him.

Warsh's hawkish pivot

When pressed on whether the inflation-review task force would reconsider the 2% target itself, Warsh remarked: "I see no reason until we have reestablished our commitment and ability to deliver on the 2% inflation objective to revisit that."

The market welcomed the comments and disregarded the management-consultant speak, the uncertainty around task forces, the lack of an economic rationale behind the rate decision and the absence of a reaction function. For now, at least, the commitment to the mandate was enough.

Market response

In the immediate reaction to the June meeting, the DXY, a dollar index weighted by a basket of major currencies, jumped from 99.5 to 101.5 after the press conference. The euro, which accounts for almost 60% of the index, reached one-year lows against the dollar. That dollar strength also exacerbated the decline in crude oil prices as the ceasefire between Iran and the US was extended.

The hawkish shift was also felt in the bond markets. The front end of the curve, which is more sensitive to expected changes in the benchmark rate, spiked as the chair's hawkish statement pushed two-year yields higher. Meanwhile, the long end, which reflects economic performance and inflation expectations, reacted little. As a result, bond spreads declined and the curve flattened – see figure below.

Higher benchmark rates feed into borrowing costs as the risk-free rate increases. They also hurt market valuations as the discount rates against future cash flows increase. Higher rates put those that borrow against the promise of future cash flows at a disadvantage – for example, AI hyperscalers that increasingly issue bonds to finance their large capital expenditures. The higher rates at the short end also make money market funds more appealing for investors.

After the Fed press conference, the market also repriced odds for a potential rate change. The odds for a cut by the end of the year collapsed from 40% to 10% before recovering to 25%. Meanwhile, the odds for two rate hikes by the end of the year jumped from 10% to over 30%.

Bitcoin

The power of the dollar was also reflected in digital-asset markets, with Bitcoin taking another dive. As shown by Sandmark analysis, the impact of a stronger dollar cannot simply be described as "dollar up, Bitcoin down." Because Bitcoin is priced in dollars, as is the case with commodities, the strength of the dollar matters. But the empirical evaluation suggests these mechanics do not necessarily hold over longer timeframes. Bitcoin can perform despite a strong dollar when crypto-specific demand or broader risk appetite offsets the macro pressure.

Future with no guidance

Warsh has been clear that he wants the market to interpret incoming data without looking to the Fed for steering. He believes financial-market pricing reveals the most important information to guide central bankers.

His first meeting marked two immediate changes: cutting the forward guidance in the accommodating statement, and staying very tight-lipped about the committee's view of the economy.

Latest empirical evidence supports Warsh's emphasis on the communication side of monetary policy. Swanson and Jayawickrema (2024), looking at the Fed's communication tools, find that speeches by the Fed chair have greater impact on and explanatory power for market moves than other announcements. FOMC announcements are found to be impactful only for the shortest-maturity rates.

On speech-related market volatility, Ahrens et al. (2025) examine risk in both equity and bond markets caused by FOMC-member speeches. The paper separates Realized Volatility (RV), how much prices move after a speech, from Tail Risk (TR), the frequency and persistence of extreme price jumps. They find that chair speeches are associated with higher RV and TR. However, informative speeches that induce economic revisions reduce volatility, suggesting that clear Fed communication about the state of the economy stabilizes markets.

Analyzing the Fed minutes, Chau et al. (2025) find that the Fed's tone determines close to 47% and 15% of the variation in uncertainty (expected volatility) and risk aversion (variance risk premium), respectively. They also find the Fed's tone has a higher impact on uncertainty than on risk aversion.

Recent empirical research reveals that communication is crucial in setting monetary policy. Commentary from the chair introduces volatility into the market, as do official policy statements. But removing forward guidance and providing little detail on the economic thinking behind decisions invites additional uncertainty and volatility.

The Fed could trigger further volatility if it decides to reduce its balance sheet from current levels. As previously noted by Sandmark research, reducing asset supply on the balance sheet without a commensurate decline in demand risks elevating volatility, as seen in September 2019. Any sustained move toward shrinkage, even if gradual, would likely exert a tightening effect on financial conditions. During the 2022 quantitative tightening cycle, tightening liquidity conditions contributed to sharp drawdowns across crypto markets.