The Fed just changed how it talks, and the market overreacted

Hey {{first_name|Investor}} -

Sending this one to everyone, free subscribers included, because it sits above any single theme I've been writing about lately.

Kevin Warsh ran his first meeting as Fed Chair last week, and the reaction told me more than the decision did. Rates stayed put, in the 3.5% to 3.75% range, by a unanimous vote. Nobody was surprised by that. The action was everywhere else: in a hawkish-looking set of projections, in a stripped-down statement, and in a press conference that, to my ear, quietly took the edge off the scary part. A lot of people read the wrong thing into all of it.

While the everyone expected the rates holding, the presentation was different.

Warsh cut the Fed's statement down to something far shorter than the version Jerome Powell used to put out, dropped the forward guidance the market had grown used to, and leaned on one line: the committee "will deliver price stability." Read that as the new north star. The focus is inflation, full stop. He also declined to pencil in his own dot on the projection chart, the grid where each official marks where they think rates are headed. Picture a roomful of forecasters each pinning a card to the board. This time the person running the room left his card blank on purpose.

Going into the meeting, the market had roughly one rate hike priced for the rest of the year. The projections came back firmer than that.

Most of the dots for 2026 and 2027 drifted higher than they sat in March, which on its own was more hawkish than many expected, even after three months of steadily firmer Fed talk as inflation kept climbing. The detail that matters: of the 18 officials who submitted a dot, 9 now pencil in at least one hike this year, which was about what people expected. But 6 of those 9 see more than one. That's a third of the committee planning for multiple hikes, and that piece ran ahead of what the market was prepared for.

The economic projections carried the same worry. The Fed's median forecast trimmed 2026 growth to 2.2% from 2.4% in March, and lifted inflation meaningfully, to 3.6% from 2.7%. Strip out the decimals and the message is plain: this is a Fed bracing for slower growth and stickier prices at the same time. Not a comfortable combination, and you can see why the first read was nervous.

Here's where I part ways with a lot of the commentary, and where the press conference did the real work.

Warsh all but told us to take the dot plot with a grain of salt. He said the projections came in with pencils that have big erasers, that policymakers don't feel bound by their dots, and that he didn't hear much conviction behind the submissions. So the single most hawkish element of the day got waved off by the person running the meeting. He also acknowledged that policy already looks restrictive for parts of the economy like housing, which is a dovish admission, not a hawkish one, and he made a point of saying the recent past need not be prologue on inflation.

Net it out. The dots leaned hawkish, the chair leaned dovish, and the two roughly cancel. I'd call the whole meeting close to neutral, maybe a hair hawkish, with a chair who came across measured and dovish in person. An analyst I follow landed in the same place. The market disliked getting less guidance, not a tightening.

By the close, the market had moved to pricing in two hikes for the year and put the odds of a July move near 40%. To me that overstates where this Fed actually is, especially after Warsh spent his press conference loosening the grip on those very dots.

It helps to remember what drives the first reaction. The initial move after a Fed meeting is largely automated. Algorithms scan the statement and the projections for keywords and fire within seconds, well before anyone has digested what the chair actually said at the podium. Short-term yields jumped, the dollar firmed, the headlines reached for "hawkish." I don't buy it. The considered, human reaction tends to come later, and I'd expect it to look calmer than the knee-jerk did.

There's a bigger reason I think the market overreacted, and it has nothing to do with policy. Warsh is deliberately going to send fewer signals and keep things short. After years of a Fed that spelled out its next several moves, a market that's used to being told what comes next suddenly has to do without that. When you take away the running commentary, the first instinct is to read the silence as a threat. It isn't. It's just a different style, and the market is going to need time to adjust to it. I'd expect a few more reactions like this one, where the absence of guidance gets mistaken for a hawkish message, until everyone recalibrates to how this Fed talks.

I also think a quieter Fed is healthier over time. A central bank that hand-holds the market every six weeks trains everyone to trade the Fed instead of the economy. Warsh is handing the homework back to investors. Uncomfortable at first, better for the long run.

Stepping back from one meeting, here's where I think the broad market is headed, and I'll flag clearly that this next part is my opinion rather than anything the Fed said.

I expect some softening over the summer, most likely in July and possibly into August. Part of that is seasonal, since summer tends to be thinner and choppier. Part of it is digestion after a strong run, with leadership narrowing and a market still feeling out a new Fed chair and a quieter communication style. None of that worries me much. Underneath the noise, the broad market still looks constructive to me, and semiconductors keep leading, which is exactly where our portfolio is positioned. The strength has been rotating, not disappearing. A pullback into the summer would look like a breather, not a top, and I'd treat it as the normal price of admission rather than a reason to head for the exits.

Here's the other half of my read. I think this year finishes strong, and a big piece of that is the calendar.

We head into a midterm election in November, and whatever you think of the politics, the incentives are easy to see. A sitting president does not want a falling stock market heading into an election that decides control of Congress. President Trump has been unusually vocal about markets, and I'd put higher odds on an administration that leans toward anything supportive, friendlier signals on trade, taxes, and regulation, rather than one that risks a downturn at the worst possible moment. That's not a political endorsement, just a reading of who's motivated to do what, and when.

Pair that with a Fed that's on hold rather than actively tightening, financial conditions that still look reasonably easy, and an economy proving more resilient than the worriers expect, and I find it hard to build a case for a washout into year-end. A summer wobble that resolves into a stronger fall and winter is the path I'd bet on if you made me pick one.

Two things keep me honest on that base case: the dollar and bond yields. Both firmed on the dot plot, and I'd like to see the dollar cool from here. A dollar that keeps pushing higher is the one development that could put real pressure on risk assets, so it's worth keeping half an eye on even while the equity backdrop looks fine.

I'm not changing my portfolio because of one press conference. Depending on your risk profile and needs, I'd gently suggest you don't either. The themes I've been building around haven't shifted. If anything, a quieter Fed and a possible summer dip give patient investors a better backdrop to keep adding to high-quality names.

The habit I'd hold onto through the summer: when the headlines get loud and the guidance gets quiet, that's the moment to do your own homework instead of trading someone else's words. Warsh just made that the rule. It's not a bad one.

I'll keep watching how the new Fed settles in and let you know if anything in this read changes.

Stay discipined, Koh

Disclaimer: Nothing in this newsletter constitutes investment advice or a recommendation to buy or sell any security. Numbers and observations are as of publication. I may hold positions in companies discussed above. Always do your own research and consult a licensed financial advisor before making investment decisions.