Dawn of a new Fed. The new Fed Chair, Kevin Warsh, made his mark by leaving out his dot; we think it communicates a lot by saying nothing at all (more on that later). First, the facts: Markets interpreted the inaugural Warsh-led Jun 2026 FOMC as a hawkish hold, with nine officials predicting higher rates for 2026, completely reversing the rate-cutting script initially communicated in the March dots. The shift higher was on the back of inflation persistence and a strong labour market, with Warsh himself leaning hawkish in the press conference, placing strong emphasis on restoring price stability. The reactions were textbook – market pricing for the fed funds rate at end-2026 rose by c.20 bps, with one full hike priced in by October this year.

Reading between the lines. For more than a decade (since 2012), markets have grown accustomed to the “dot plot” – a scatterplot showing the (median) opinion of 19 people on where they think the price of money should be over the next few years. This is the closest thing to soothsaying we have in modern finance; as a result, hordes of investors, economists, and bankers would often pore over these newly released plots over several months to divine where asset prices might be in the future. But days ago, only 18 dots surfaced where 19 should have been. The chairman’s dot – arguably the most important one – was absent. Mathematicians would tell you that one data point would never be able to shift the median result, but this was never about setting rates. The greater point of the missing dot – one that should not be missed – is that forward guidance is now decidedly behind us.

Say less. More than withholding his dot, Warsh shortened the post-meeting statement and removed forward guidance (including the phrase that hinted at future easing). One could argue that this was necessary for the times. Firstly, forward guidance only became more useful as a policy tool in the post-GFC era where rates were already floored at the zero-bound; without the ability to lower rates, the Fed needed policy communication as a dovish lever to signal intent. With rates above neutral today, there is now a much larger buffer for shifting rates as is necessary. Secondly, the Fed itself (nor anyone else, for that matter) are not good at predicting rates. The dot plot “commitment” often becomes a handcuff that hinders flexibility and raises risks; one could argue that the 2023 banking crisis was exacerbated by an overextended commitment by the Fed to “lower-for-longer” rates, resulting in several banks taking excessive duration risks. Should forward guidance be further pared back, greater uncertainty is likely to be priced into bond markets, resulting in rising term premiums.

The declaration of independence. As much as the inflation and employment data have negated the case for rate cuts, there could be a more strategic reason for Warsh’s decisive hawkish tilt. Lest we forget, the original market perception of Kevin Warsh’s nomination to replace Jerome Powell was that he might be more willing to “do Trump’s bidding” in cutting rates – nothing could be worse for a new chair than the immediate undermining of their credibility. Warsh begins with a frank commitment to price stability, but the greater, unspoken commitment is to Fed independence – showing that he is more willing to respond to inflationary pressure than political pressure. He follows up by announcing the establishment of five task forces to oversee (1) Fed communications, (2) the balance sheet, (3) the use of and reliance on data sources, (4) productivity and jobs in the age of AI, and (5) the Fed’s inflation frameworks. While such reforms are necessary, they also make the Fed decision-making process more opaque and resistant to “external influences”.

What is said versus what is done. How should one anticipate policy from here? We find it interesting that the FOMC meeting came so close to the preliminary deal that President Trump had signed with Iran to end the war in the Middle East and reopen the Strait of Hormuz. Given the highly uncertain nature of such deals, we think that most of the Fed voting members treated such news with caution and reserved a hawkish stance; as such, a full reopening could prove a dovish surprise. Moreover, Warsh had commented during his nomination about his preference for assessing inflation through the Dallas “trimmed-mean” PCE (which excludes extreme outliers in spending categories), suggesting a greater willingness to “look-through” the inflationary impact of the Iran war. Given that the 2-year portion of the US yield curve has risen the most significantly on the back of this meeting, the risk-reward has shifted in favour of short-duration bonds – we remain positive on our Liquid+ strategy in 2-3 year Investment Grade credit as an alternative to cash.

Credit strategy remains status quo. In our 2Q Global Credit Outlook, we opined that “we may be closer to the end of the rate-cutting cycle than previously thought. As such, the policy tailwinds for bonds in 2025 are unlikely to spill over to 2026”. Much of what has happened in the second quarter has validated the more cautious shift to a neutral stance on bonds. Spreads, in sympathy with other risk assets, are also back to YTD tights. We continue to think that the tailwinds of spread compression and policy dovishness are no longer a reliable story for 2026 – credit returns are likely to be dominated by coupon carry. Nonetheless, this carry, given the latest hawkish shift from the Fed, is offering much greater compensation and will likely outperform cash in the longer term. That said, the removal of forward guidance and likely higher term premiums/steeper curves suggest again that investors are not compensated for excessive duration risk – we reiterate that our 5-7 year optimal duration is much preferred to risk-taking with ultra-long bonds at this juncture.

Figure 1: 1990s-era lower communications, 1990s-era higher term premiums

Source: Bloomberg, DBS


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