Kevin Warsh May Throw President Donald Trump Under the Bus in His First FOMC Meeting as Fed Chair

U.S. inflation rose to a three-year high of 4.2% in May, with core CPI at 2.9%, while the Fed is expected to keep rates unchanged at today’s meeting. The article argues Fed Chair Kevin Warsh is likely to shift the FOMC from an easing bias to a neutral stance and potentially blame President Trump’s tariff and Iran-related policy shocks for higher prices. Wall Street is now pricing a rising probability of a rate hike by December 2026, with CME FedWatch odds nearing 60%.

Analysis

The key market implication is not the level of rates today but the policy regime shift: moving from an easing-bias Fed to a neutral-or-higher-for-longer stance removes a major valuation prop from crowded duration assets. That matters most where cash flows sit far in the future and have been financed on the assumption of cheap capital — notably AI infrastructure, high-multiple software, and long-duration growth baskets. The first-order move may be a modest re-rating lower, but the second-order effect is a tightening in private capital formation, which can slow incremental capex orders into the semiconductor and data-center supply chain over the next 2-4 quarters.

The more interesting cross-asset setup is that a hawkish Fed into sticky inflation is typically bullish for volatility and for rates-sensitive hedge instruments, but not uniformly bearish for equities. Higher front-end yields can help the financial sector and market-makers, while the biggest losers are levered balance-sheet stories and companies dependent on refinancing windows. In that context, CME is a relative winner: elevated policy uncertainty and a higher implied path for hikes support volumes in short-rate and rates options, with the cleaner upside coming from volatility rather than direction.

The contrarian point is that the market may already be pricing a fair amount of this shift. If the FOMC merely removes easing language without a strong signal of imminent hikes, the immediate equity drawdown could be shallow and reversed by a relief rally in the mega-cap growth complex. The real downside tail is a faster-than-expected inflation persistence shock that forces the Fed to signal hikes within 1-2 meetings, which would likely hit long-duration equities, small caps, and credit spreads simultaneously.

Key Decisions for Investors

• Go long CME on a 1-3 month horizon; use pullbacks to build. Higher policy uncertainty and a rising hike probability curve should support rates/options volume and structurally higher clearing activity. Risk/reward is favorable because the name monetizes volatility rather than relying on a single macro direction.
• Reduce exposure to high-duration growth and AI infrastructure proxies over the next 2-6 weeks; if keeping beta, pair long CME vs short a basket of NVDA/INTC on a relative basis. The thesis is not a collapse in AI demand, but a lower multiple for capex-funded growth as real rates stop easing.
• Buy downside hedges on the Nasdaq via put spreads 1-2 months out. This is a cleaner expression than outright shorting because the base case is a modest regime repricing, while the tail risk is a sharper move if the Fed explicitly tilts hawkish.
• Favor financials with active trading/clearing exposure over rate-sensitive REITs and small caps for the next quarter. A neutral-to-hawkish Fed usually improves monetization of volatility and steepens dispersion across financing-sensitive sectors.
• If inflation data stays hot into the next CPI print, add a rates-volatility trade rather than a directional bond short: long short-term rate vol or payer swaptions. The asymmetry is better than chasing already-congested Treasury shorts if the Fed only signals patience.