The Fed Isn't Cutting Interest Rates Anytime Soon -- and Kevin Warsh Is Putting the Blame Squarely on President Trump

The Fed held the federal funds rate steady at 3.5% to 3.75% and now sees a median 3.8% year-end rate, while 9 committee members expect at least one hike in 2026 and only one expects a cut. The FOMC cited elevated inflation and supply shocks tied to Middle East conflict, implying rate cuts are unlikely and volatility may persist. FedWatch now shows a 0% chance of a cut at the next meeting and an 85.5% chance of a hike by the final December 2026 meeting.

Analysis

The market implication is not simply “higher for longer”; it is a regime shift from policy-as-stabilizer to policy-as-problem. If the Fed is now willing to tolerate tighter financial conditions to re-anchor inflation expectations, the first-order loser is duration-sensitive equity beta, but the second-order loser is anything priced off terminal-rate compression: small-cap levered balance sheets, REITs, housing-adjacent lenders, and speculative unprofitable growth. The most important change is that volatility itself becomes an asset class tailwind, because every macro print and energy headline now has a higher probability of repricing the path of rates rather than just the next move.

CME is the cleanest structural beneficiary because its earnings sensitivity to realized and implied rate volatility is asymmetric; even if the base rate stays unchanged, a wider distribution of outcomes boosts volume in rate futures, options, and hedges. NDAQ is more mixed: it benefits from elevated trading volumes, but a persistent hawkish shock can suppress IPO/M&A activity and hurt capital markets fees, so this is a better relative short against CME than an outright long. The deeper second-order effect is on bank NIMs: large banks may see modest spread support, but credit costs will lag with a 2-3 quarter delay if energy-driven inflation keeps household real income under pressure.

The contrarian risk is that the market may already be pricing the hawkish pivot too aggressively. If geopolitical risk premium fades faster than expected and energy inflation rolls over, the Fed can still preserve optionality without cutting soon, which would relieve pressure on duration and lower-quality growth before hard data weaken materially. That argues for staying tactical rather than making a directional macro bet on a full-blown hiking cycle.

Key Decisions for Investors

• Long CME vs short NDAQ over the next 1-3 months: CME should monetize higher rate-path uncertainty more directly, while NDAQ is exposed to capital-markets slowdown; target 1.5-2.0x relative return if volatility stays elevated.
• Buy CME upside via call spreads into the next FOMC meeting: use 1-2 month tenor to capture event-driven repricing with defined downside; best if FedWatch probabilities keep shifting toward a hike.
• Pair long XLF / short IWM for 1-2 quarters: large banks can absorb modest NIM support better than small caps can absorb higher funding costs and refinancing pressure; risk is a sharp dovish turn or rapid oil disinflation.
• Add a tactical long VIX or SPX put spread ahead of the next two macro prints: the setup favors abrupt downside convexity if the market re-prices terminal rates higher again.
• Underweight unprofitable tech and housing-sensitive names for now; keep the position size small because the trade reverses quickly if energy inflation decelerates and the Fed’s hawkish bias proves more rhetoric than action.