Fed: Kevin Warsh's First Meeting Cools the Markets

The new Federal Reserve chairman delivered a hawkish message that surprised many with its strength. Investors now expect U.S. interest rates to rise by the end of the year, whereas they had previously anticipated that rates would remain unchanged.
 

Kevin Warsh’s first meeting as head of the Fed was widely anticipated, but its tone still caught traders by surprise. The new chairman issued an unusually brief monetary policy statement, with no indication of the future direction of policy, and declined to release his own rate forecasts, confirming his skepticism regarding the dot plot—the chart showing Fed members’ projections—as a communication tool. The signal was interpreted as significantly more hawkish than expected, and the markets adjusted their expectations in the wake of the meeting.
 

The weekly analysis by J. Safra Sarasin highlights one key point. The unanimous support of the twelve voting members suggests that Warsh was able to forge a consensus around a more hawkish committee. The magnitude of the upward revision to key interest rate forecasts came as a surprise: markets are now pricing in about one and a half rate hikes by the end of the year, compared with less than one before the meeting. 

The new chairman also reaffirmed the Fed’s commitment to its 2% inflation target—a way of reassuring the market about the continuity of its policy stance, even as its approach is changing significantly. This dual message—firmness on interest rates and adherence to the inflation target—restores the dollar and long-term U.S. interest rates to a central role in market decisions over the coming months.
 

Five Areas for Reforming the Institution
Beyond the message on the current economic situation, Warsh outlined a overhaul of the central bank’s operations. He announced the creation of five working groups focused on the Fed’s communication, its balance sheet and operational framework, alternative data sources, the link between productivity, employment, and artificial intelligence, and the framework for analyzing inflation. 

Taken as a whole, this paints a picture of an institution that intends to rethink both its tools and its messaging, and that is embracing a stylistic break from the previous period. The bank’s note sums up this direction in a single phrase: “a man with a plan.” For investors, these initiatives will determine the clarity of monetary policy and the volatility of the fixed-income markets in the coming quarters.
 

With the SNB on the sidelines, emerging markets lie in wait
In Europe, the trajectory is different. The Swiss National Bank left its key interest rate unchanged at 0% and said it was “more willing to intervene in the foreign exchange market.” Despite higher-than-expected inflation, J. Safra Sarasin considers a Swiss rate hike before the end of 2027 unlikely. The report also highlights another underlying trend: global rearmament, fueled by geopolitical tensions, is driving up defense spending. Among emerging markets, South Korea and Turkey are already among the leading arms exporters, while Poland, India, and Saudi Arabia are on a path that could make them more competitive. 

The resulting demand for critical raw materials is expected to benefit producers in Latin America and Central Asia. Finally, the bank notes that SpaceX’s initial stock market performance is in line with that of previous IPOs. These are all allocation factors that investors exposed to both the dollar and franc-denominated assets should take into account.
 

The new president’s refusal to provide his own interest rate projection deprives the markets of a benchmark they used to closely monitor at every meeting and increases the weight of economic data in shaping market expectations. In Switzerland, the easing of upward pressure on the franc gives the central bank room to wait, provided that foreign exchange interventions are sufficient to contain the currency. For a diversified portfolio, the divergence between a more hawkish Fed and a static SNB becomes a factor in arbitrage between dollar-denominated assets and safe-haven assets.