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Introduction

Due to the shortened trading week, we will keep this update brief and provide a more comprehensive review in this weekend's report.

Wednesday marked Kevin Warsh's first FOMC meeting as Chair. While the policy decision itself was largely in line with expectations, the Committee's hawkish tone caught many investors off guard. Both the S&P 500 and Nasdaq declined more than 1% following the announcement as markets adjusted to a less accommodative outlook.

The biggest surprise came from the updated Dot Plot. Roughly half of FOMC participants now expect at least one additional rate hike this year, reinforcing a higher-for-longer policy stance. Warsh offered little guidance during the press conference to temper those expectations, instead reiterating the Committee's commitment to containing inflation. With equities already showing signs of fatigue heading into the meeting, the hawkish shift provided another catalyst for selling pressure and suggests the Fed's concerns extend beyond recent moves in energy prices.

Post-meeting, Fed Funds futures moved to price in a full rate hike by October. That is a material departure from prior expectations and helps explain the market's negative reaction, as investors adjust to a more restrictive policy outlook.

Adding to the inflationary narrative, retail sales surprised to the upside despite higher gasoline costs. The strength in consumer demand provided further support for the market's repricing of Fed policy expectations.

The repricing in policy expectations pushed the 2-year Treasury yield to its highest level since March 2025, underscoring the market's embrace of a higher-for-longer rate environment.

The more interesting development is occurring at the long end of the curve, which has remained relatively stable despite the surge in 2-year yields. The divergence suggests markets view the hawkish shift as a near-term policy issue rather than a structural inflation problem. Consequently, the 2s/10s spread has compressed sharply toward neutral.

There is a lot for markets to digest. With the largest quarterly OPEX of the year on deck tomorrow, investors should expect elevated volatility, portfolio rebalancing activity, and potentially exaggerated price movements around key technical levels.

Let's take a quick look at the charts.