Wash is viewed by the market as a proponent of interest rate cuts, but what he actually takes over is a severely divided FOMC and a persistently inflationary environment. Coupled with controversies over raising neutral interest rates and political pressures, the space for rate cuts has been significantly compressed. The market pricing is misaligned with reality, and U.S. treasuries, tech stocks, and gold all face risks of repricing, with key variables being the situation in Iran and the June FOMC statement.

Written by: Wall Street Insight Research Team

Trump chose Wash to cut interest rates. But on May 15, when Wash officially took over the chair left by Jerome Powell, he inherited not a Fed ready to cut rates at any time, but a FOMC where three governors even disagreed on the "implied possibility of a rate cut next time."

Those three opposing votes—Hammack from Cleveland, Kashkari from Minneapolis, and Logan from Dallas—cast what was the most unusual dissent since October 1992 at the end of April's meeting. They weren't opposed to cutting rates; they were against the "tone being too soft." They believe that in the current inflation environment, there should not even be an implication of a rate cut.

What Wash takes over is a central bank that is almost tearing itself apart from the inside.

A Misunderstood Individual by the Market

The market's mainstream characterization of Wash comes from two rather unreliable sources.

The first: Trump chose him precisely because he wants to cut rates. The logic is—by choosing him, he will cut. The second: during the confirmation hearing, Wash showed some agreement with the view that "the Iranian oil shock is temporary," which was interpreted as a dovish signal.

Both inferences skip over the most genuine aspect of Wash from the past fifteen years.

In November 2010, the Fed was discussing QE2—whether to purchase another $600 billion in government bonds. Wash cast a supporting vote that day. In the same week, he published an article in the Wall Street Journal criticizing QE2. Supporting the vote, opposing in writing—this is extremely rare in Fed history and is referred to by later researchers as "silent dissent"—not really agreeing, just unwilling to disrupt the consensus.

At that time, core PCE had never exceeded 2.5%, and the unemployment rate was as high as 10%. There was no obvious inflation pressure, but Wash delivered 13 speeches specifically mentioning "upward inflation risks" between 2006 and 2011. While other governors were discussing how to support employment, he was already worrying about an enemy that had not yet appeared.

Now that enemy is at the door. April CPI was at 3.8%, a three-year high. The energy shock from the war in Iran caused gasoline prices to rise by 28.4% year-on-year, with fuel prices rising by 54.3%. In the first week after Wash took over, the 30-year treasury yield had just touched 5.19%, just one step away from the highs of 2007.

Inflation is Not Just an Iranian Issue

There is a reasonable core in the dovish argument: the Iranian oil shock is an exogenous event. Once negotiations over Hormuz make progress and oil prices fall back from $100+ to $75-80, energy inflation will quickly dissipate, and the CPI figures will naturally improve, giving Wash a window for rate cuts.

This logic holds. But in the April inflation data, one line of numbers makes it less clean.

Service-sector inflation jumped to +0.5% month-over-month in April. In March, this figure was +0.2%.

There's not much gasoline in service-sector inflation. The rising prices of dining, healthcare, transportation services, and entertainment are not directly related to Hormuz. The housing subcomponent saw a month-on-month increase of +0.6%, doubling its contribution. The core CPI, excluding food and energy, rose +0.4% month-over-month in April, the fastest single-month increase since the end of 2025.

In other words, inflation is spreading from the energy side to the service side. Once this process starts, even if oil prices retreat to $80 tomorrow, price pressures in the service sector will not disappear within two or three months.

This is exactly the old path that the Fed misjudged as "temporary" in 2022. At that time, Powell said inflation was temporary, and when he realized that the stickiness in the service sector had emerged, he could only employ the most aggressive rate hike cycle to catch up. Wash has historically awakened to inflation issues earlier than the market—this time, he is unlikely to make the same mistake.

The FOMC He Inherits

There is one more thing the market has not fully priced: the Fed that Wash takes over has already been unusually divided internally.

At the April 28-29 meeting, the decision to leave rates unchanged was ostensibly a vote of 8-4. The 8-4 split itself is abnormal—the last time there were four dissenting votes was back in October 1992. But what is more subtle is the direction of those four votes: three votes opposed any implication of a rate cut while one vote supported it. At the committee, two directions of dissent simultaneously existed.

In the FOMC statement, the committee changed its description of inflation from "somewhat elevated" to "elevated." This upgrade in wording has been undervalued by the market. In the Fed's language system, this is not a minor revision; it is a clear signal from the board to the market: our tolerance for inflation is shrinking.

As Chairman, Wash must build consensus within this board. He faces three members—Hammack, Kashkari, and Logan—who believe that not even an implication of "the next step could be a rate cut" should appear; each of whom is more eager than him to tighten. He wants to cut rates, but first, he has to persuade these three individuals.

Now, no one can tell you how he will accomplish this.

The Hidden Issue of Neutral Interest Rates

There is another debate that hasn't entered the mainstream narrative, but it could be the most important background in the whole situation.

The committee's median estimate places the neutral interest rate (r-star) at about 3.0%. The current federal funds rate sits at 3.5%-3.75%, so from this perspective, monetary policy is in a "restrictive" range—applying brakes to the economy, and inflation will gradually come down.

However, the Cleveland Fed has a model that estimates the neutral interest rate to be 3.7%. If this estimate is closer to reality, the current 3.5%-3.75% is not genuinely restrictive; at most, it is "neutral and tight," insufficient to continuously suppress inflation.

Wash has consistently tended to believe that r-star is higher than the committee's estimate in his past research and speeches. If, after taking office, he promotes a reevaluation of the neutral interest rate assumptions at the Fed, it would mean that not only is there no space for rate cuts, but even the premise that "current policy is already tight enough" would come into question.

The market has not priced this scenario.

Another Political Equation

Trump spent almost a year placing someone willing to "dramatically cut rates" into the position of Fed chair. This event itself has already changed the political ecology of the Fed.

The confirmation vote of 54-45 is the closest in history for a Fed chair confirmation, more divisive than any past sessions. During Powell’s tenure, he was summoned to Congress for testimony by Trump’s prosecutors, openly ridiculed as "too late." The renovations at the Fed headquarters have been used as a political tool, and the crisis of Fed independence has become one of the most watched themes of 2025.

Wash's current situation is this: he was chosen to cut rates, but the conditions for a rate cut do not exist; if he insists on not cutting, Trump’s next reaction is unpredictable; if he yields to political pressure to cut rates, inflation will signal to the market that the Federal Reserve is no longer independent.

This is not a question with a standard answer.

How Assets Will Move

First, look to the bond market.

The long-end U.S. treasuries have consistently been the most honest scoreboard of this macro narrative. The 30-year yield has risen from 4.4% at the beginning of the year to 5.19%, while the 10-year reached 4.67%. Barclays’ Ajay Rajadhyaksha has explicitly stated that 5.5% is not the peak, and they are warning that this level will be broken. Citi’s macro rates strategist McCormick said 5.5% has already become traders' new "round number target."

The mechanisms driving the long-end higher are not complex: on June 16, if Wash's statement includes any wording close to "not ruling out further tightening," the 30-year treasury will be repriced to the 5.3%-5.4% range within 30 minutes. At that point, 5.5% will not be a prediction but the next destination.

Conditions for failure: substantive breakthroughs in the Iran negotiations before the June FOMC, the Strait of Hormuz resumes navigation, oil prices drop from $102 to below $80—then, the May and June CPI data would show significant improvements, necessitating a complete revision of this judgment.

Tech stocks are second in line. The Nasdaq’s Forward PE has compressed from a peak of 33 times last year to a range of 27 times, but the historical average hovers around 20-22 times. As long as the 10-year treasury remains above 4.5%, it acts as a ceiling for tech stock PE multiples. The first stage of compression is the "disappearance of rate cut expectations," and the second stage is the "reignition of rate hike expectations"—there is a hurdle between these two stages, and we have just crossed the first one.

Specifically: after the conference call ends, funds will first focus on whether there are any hints of a rate cut timetable in Wash's wording. If not—current baseline scenario—the Nasdaq’s correction will enter tech-weighted stocks within 48 hours. Nvidia, Microsoft, and Apple are the first impacted, followed by second-tier tech and growth stocks, which are more elastic and harder to predict in direction.

Gold reads the most ambiguously within this framework. In theory, rising real rates are unfavorable for gold, but real rates are nominal rates minus inflation expectations—if the market begins to worry about Fed independence, inflation expectations themselves may rise, potentially offsetting the upward pressure from rising rates on gold. Additionally, as the U.S. fiscal deficit continues to expand and foreign central banks continue to buy gold to de-dollarize, gold may experience a scenario of "rising rates but not declining prices." This is not a main judgment but an edge circumstance that needs observation.

The dollar is relatively straightforward: rising rate hike expectations → dollar strengthens. However, if the market determines that the Fed independence issue has already become structural, this logic will be discounted.

The Most Important Thing Before June 17

The progress of the Iran negotiations is the biggest variable in all of this.

Iran's Foreign Minister Araghchi said last week that the agreement was "a few inches away"—at the same time, he said, "I have no trust in the Americans." Trump halted the planned military strike on Iran on May 19, citing "serious negotiations in progress." But the Strait of Hormuz is still under control, and the transfer of 40 kilograms of highly enriched uranium has not yet been resolved.

If the negotiations collapse before June 16 and oil prices return to $110+, the May CPI will likely exceed expectations again, placing Wash's first FOMC opening in the worst scenario. If breakthroughs occur before this, oil prices fall back, and inflation data improves, the entire "Wash being cornered" logic will soften.

The former scenario is negative for the bond market and tech stocks; the latter provides Wash with a temporary breathing space—but even so, the endogenous stickiness of service sector inflation will not disappear, at most postponing the issue by a few months.

June 17

The most important date on the Fed calendar this year is June 17 at 2:30 PM—when Wash takes the stage to present his first FOMC statement as chair and then answers reporters' questions.

That day, a single word will be analyzed repeatedly: does he use "patient" or "vigilant," does he mention interest rate hikes, how does he describe the persistence of inflation, how does he respond to questions like "What is your conversation with Trump like?"

The answers will tell the market how much it mispriced Wash and how long it will take to correct that error.