The Fed’s New Boss Has One Meeting to Calm Markets — or Crash Them

TLDR

• Kevin Warsh begins his first Fed meeting as chair on Wednesday, with rates expected to hold steady
• Inflation hit 4% in May, the highest in three years, putting pressure on the Fed to act
• The stock market rally is narrow, with tech and AI driving most gains — the Nasdaq is up 24% this quarter
• Morgan Stanley warns that high equity financing costs create fragility in the market
• A US-Iran interim peace deal could ease oil prices, but economists say inflation relief will take months

Kevin Warsh stepped into his role as Federal Reserve chair on May 22, 2026, and faces his first rate-setting meeting on Wednesday. The Fed is widely expected to hold rates steady, but all eyes are on what Warsh says next.

Inflation has stayed above the Fed’s 2% target for more than five years. In May, headline inflation hit 4% — the highest in three years. Prices businesses paid jumped 6.5%, and core inflation rose nearly 3%.

The Iran conflict has pushed energy prices higher, adding fuel to the inflation problem. On Sunday, the US and Iran agreed to an interim peace deal that would reopen the Strait of Hormuz by Friday, opening a 60-day negotiation window on Tehran’s nuclear program.

Economists say that even if the deal holds, it will take weeks or months for oil shipments to normalize and energy prices to fall.

A Hawkish Shift Expected

Greg Daco, chief economist at EY-Parthenon, said Warsh will inherit a committee that has turned more hawkish. His first job will be proving his decisions are based on economics, not politics.

The Fed’s dot plot, updated this meeting, is expected to shift. The March forecast penciled in one rate cut for 2026. Now, many expect that to move to no cuts — and some members may project rate hikes.

Patricia Zobel of Guggenheim Investments expects several Fed members to put rate hikes as their base case, with some projecting two hikes this year.

Capital Economics’ Stephen Brown says Warsh likely won’t submit his own rate projection this meeting. But he warns the risk is that Warsh sounds more hawkish than markets expect.

Former Kansas City Fed president Esther George said there’s a strong argument to raise rates, especially with the One Big Beautiful Bill Act and deregulation boosting demand.

Tech Rally at Risk

The stock market has surged this year, but the gains are narrow. Only about a third of S&P 500 stocks are beating the index. The Nasdaq is up 24% this quarter, and the PHLX Semiconductor index closed Monday at a record high, up 85.8% in the second quarter.

Morgan Stanley strategist Martin Tobias says investors are using leverage to build tech positions. That leverage is tied to borrowing costs.

Financing costs, based on the spread between S&P 500 futures and the Fed’s overnight rate, are at a record high. Banks have around $223 billion exposed in equity repo markets — also a record.

Tobias says equity financing has risen more than 50% in the past year, mostly driven by chips. He calls this a “clear fragility” in the market.

If Warsh signals higher rates, the same leverage that pushed markets up could work in reverse — forcing investors to sell.

Not everyone sees doom. Luke Tilley of Wilmington Trust expects rate cuts late in 2026, saying core inflation will slow enough for the Fed to act before year-end.

The Fed’s statement and Warsh’s press conference Wednesday will be closely watched for any shift in language around future rate cuts or hikes.

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