By Joy Wiltermuth
Trump-selected Fed chair may hope the threat of rate hikes is enough. But stocks might gain ground if he does. Past rate-hike cycles can be a guide.
Charges are afoot at the Federal Reserve, according to Kevin Warsh.
Kevin Warsh wants to write a &#34;new chapter&#34; for the Federal Reserve, where markets talk louder than the central bank, and even the threat of rate hikes might help win the inflation fight.
Less Fed guidance risks introducing more volatility into markets, but Wall Street seems to be warming to the idea already.
&#34;I do think it's a good thing for the Fed to say a little less,&#34; said Liz Thomas, chief market strategist at SoFi. &#34;Yes, it would be a change,&#34; she said, but it would let markets focus on other things, instead of Fed statements and forward guidance, which are just a best guess and often incorrect, she added.
Fed officials wrapped up their June meeting by holding rates steady, issuing a brief statement and leaving the door open to rate hikes this year. Stocks fell afterward, but they posted weekly gains.
The policy-sensitive 2-year Treasury yield BX:TMUBMUSD02Y reacted by ending the week at 4.177%, the highest since February 2025, according to Dow Jones Market Data. That signals investors are taking the threat of Fed rate hikes seriously, with inflation above 4%.
Warsh reiterated the Fed's goal of getting inflation down to 2%, during his first press briefing at the helm of the central bank on Wednesday. What caused more of a stir was his suggestion that pricing in financial markets should take the lead - not the Fed - in terms of signaling where the economy, rates and inflation could be headed.
&#34;I do like communication,&#34; said Scott Wren, senior global market strategist at Wells Fargo Investment Institute, adding that there was too little Fed communication in the 1980s, when he was a currency trader.
Yet Wall Street's job is to &#34;make projections on the economy and inflation,&#34; Wren said. &#34;Our job is not to sit there and wonder&#34; what the Fed might say about it.
&#34;The Fed tends to be reactive,&#34; Wren added. &#34;It's probably better they follow the market, rather than lead.&#34; He still isn't convinced the Fed needs to hike rates, because of what looks to be a temporary oil shock.
Instead, his team's call is for the Fed to hold rates steady in the current 3.5%-to-3.75% range through the end of 2027, which would set the stage for a higher rate backdrop for much longer than many anticipated at the start of this year.
Stocks and past hiking cycles
It's too early to tell if the latest, and already shaky, 60-day cease-fire between the U.S. and Iran turns into a lasting peace. Oil prices (CL00) (BRN00) have tumbled, but it's unclear that they will stay low enough to coax inflation down fast enough to avoid a Fed rate hike this year.
On the positive side, a historical look at the stock market shows that past rate-hike cycles didn't doom the stock market. Since the early 1990s, the S&amp;P 500 SPX rose during four of the five past hiking periods, as the below chart shows.
About the AI economy
The economy has been surprisingly resilient, even with higher borrowing costs in the background. At times, optimism around stronger economic growth has helped the bull market broaden out beyond its tech leadership.
But its main source of strength could also turn into weakness. Corporate borrowing has been surging to fuel the artificial-intelligence race. But the savings rate of U.S. households also has plunged, which has helped drive consumption, even though real incomes have contracted from a year ago, as the chart below shows.
Société Générale notes that if the U.S. saving ratio stops falling, consumer spending will grow in line with income, which is falling.
Households are feeling wealthier as the AI-driven bull market continues, which is &#34;all well and good until asset prices go back down,&#34; said Albert Edwards, global strategist at Société Générale, in a Thursday client note.
&#34;Hence both consumption and investment are dependent on the AI 'bubble' not bursting,&#34; he said.
Thomas at SoFi said that if the Fed ends up needing to raise rates because of high inflation, that wouldn't be great for stocks. &#34;It may help the credibility of the Fed, showing they're serious about getting inflation back down, even if it creates pain,&#34; she said.
&#34;But the AI push needs to keep going,&#34; Thomas said. &#34;That's a lot of what's holding us up,&#34; she said of the bull market. There's also enthusiasm around AI increasing productivity, bringing inflation down and hope that company spending can keep the economy humming, she said. &#34;Without that show, there is no show.&#34;
The S&amp;P 500 gained 0.9% in the holiday-shortened week, the Dow Jones Industrial Average DJIA rose 0.7% and the Nasdaq Composite COMP gained 2.4%, according to FactSet. All three indexes ended 2.1% or less away from their previous record highs.
Tomi Kilgore and Ken Jimenez contributed.
-Joy Wiltermuth
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06-21-26 1842ET

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Kevin Warsh, the Trump-selected Fed chair, advocates for reduced central bank guidance, suggesting financial markets should lead economic signaling. While this shift may increase volatility, Wall Street analysts view it positively as it allows markets to focus on projections rather than Fed statements. Historical data indicates past rate-hike cycles have not necessarily ended bull markets, with the S&P 500 rising in four of five such periods since the 1990s. However, the current market's resilience relies heavily on continued AI-driven optimism and corporate borrowing.

- Kevin Warsh advocates for the Federal Reserve to prioritize market signals over direct guidance, suggesting that even the threat of rate hikes could aid in controlling inflation.  
- Despite a steady interest rate after the June meeting, investors are reacting to the potential for future hikes, indicated by rising Treasury yields.  
- Historical trends show that the S&P 500 has generally performed well during past rate-hike cycles, although current reliance on AI-driven market growth raises concerns about sustainability.

This bull market isn't going to end because of Fed rate hikes under Warsh