Last Friday’s significantly stronger US nonfarm payrolls report has forced the market to price out any remaining structural easing bias, putting the prospect of a Fed hike in 2026 firmly back on the table. Apart from May’s 172k beating the 88k consensus, the upward revision to April’s 115k to 172k should neutralize the hawkish setups expected from other central banks in the Eurozone, Japan, and New Zealand, keeping the USD bid into the June 16-17 FOMC meeting. On June 10, markets will brace for May CPI inflation to jump to a three-year high of 4.2% YoY. Since Operation Epic Fury on Feb 28, inflation has risen from 2.4% in February to 3.3% in March and 3.8% in April.
Despite the current bullish momentum, market participants are keeping their long-USD exposures on a tight leash. The June 17 meeting marks the official debut of newly confirmed Fed Chair Kevin Warsh, who faces the daunting task of establishing personal institutional integrity. Warsh will first need to balance President Donald Trump’s desire for rate cuts with the FOMC members’ increased data-dependent inclination towards a longer, more hawkish pause. Warsh will likely align with US Treasury Secretary Scott Bessent’s view that the wartime inflation surge to 3.8% was a transient blip that would naturally evaporate when the Iran conflict ends, and the Strait of Hormuz reopens.
Warsh may kick-start his reform agenda by withholding his own projections from the June dot plot, taking a direct shot at the Fed’s forward guidance framework. Warsh has already appointed two outsider economic policy researchers – Paul Winfree and Daniel Heil – as interim advisers to find an alternative measure of inflation outside Core PCE, design a communication strategy that limits the Fed’s public forward guidance, stop the Fed from “hand-holding” Wall Street, and map out a blueprint to reduce the Fed’s balance sheet. If Warsh attempts a unilateral change, it could start an internal fracture within a committee of structurally independent regional bank presidents and governors.
Hence, it was no coincidence that Warsh’s predecessor, Jerome Powell, used his acceptance speech for the JFK Profile in Courage Award on May 31 to warn that the Fed was undergoing a "stress test" due to escalating political pressure. Earlier on May 28, ECB President Christine Lagarde also noted that the Fed’s fight to maintain independence has not been settled by Warsh’s appointment.
In summary, the upcoming June FOMC meeting is no longer just a routine policy review. While strong nonfarm payrolls and an impending 4.2% CPI spike give the USD short-term fundamental backing, last Friday’s aggressive sell-off in US equities amid a bear-steepening in the US Treasury curve, despite declining crude prices, reflected deeply anxious markets. The USD’s trajectory will depend not solely on incoming data but on whether the Fed can survive its first major structural "stress test" without cracking from within.
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June 8 in history
In 1816, Sophie Germain became the first woman to win a prize from the Paris Academy of Sciences for her paper on elasticity.
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