And because the US is grappling with inflation above 4% thanks to its government’s decision to poke the Middle East, and because the latest US jobs figures looked improved, the verdict was clearer than at the previous meeting.

The dot plot showed that:

Scaling back the number of Fed comments, I think, is a good idea because yes, there are too many of them making too much noise.

Scaling back the size of the Fed’s balance sheet is a good idea as well, but every investor knows what would happen to financial markets when that post-GFC liquidity is withdrawn.

Relying less on delayed and frequently revised government statistics, and more on real-time market signals (yields, credit spreads, commodity prices, inflation expectations from TIPS), private-sector data, and productivity trends to better gauge where the economy is heading rather than where it has been is a good idea too – especially at a time the quality of the government data is increasingly questioned.

But not being willing to put a dot on that dot plot, however, is a double-edged sword. Today, given the level of unpredictability of US policies, it is impossible to make predictions. At best, you can build scenarios. But leaving the market without forward guidance means that Fed decisions in the Warsh era will be less predictable and will come as a surprise, which will undoubtedly inject volatility into financial markets. Remember, Fed decisions today are somewhat a formality. The Fed guides markets toward a decision and, in most cases, those decisions are largely priced in – the market readjusts to details by making a few dovish or hawkish adjustments. But if you shush Fed members and do away with forward guidance, decisions will come as a surprise and monetary policy transmission could be less effective.

All in all, the Warsh era looks set to be markedly different—and potentially far more volatile—than the past two decades. I guess we will find out more as we move on!

Investors didn’t like what they heard

Anyway, the Fed’s hawkish policy announcement on inflation concerns sent the US 2-year yield – which is known to best capture Fed expectations – to the highest levels in almost one-and-a-half years. The spread between the US 2- and 10-year yields fell to the lowest levels in a year – an inversion is generally read as economic trouble with a possible recession. Activity on Fed funds futures now assesses more than a 70% chance of an October rate hike, and nearly an 85% chance of a December hike.

Naturally, the thought of a hawkish Fed policy and higher interest rates weighs heavily on risk appetite. The S&P 500 and Nasdaq sold off around 1%, and the Magnificent Seven fell nearly 3%, leaving many opened tabs in investors’ minds and a sour taste in doves’ mouths.

The decision was so unexpectedly hawkish that one has to wonder whether it wasn't a carefully orchestrated move to demonstrate Kevin Warsh’s independence from the White House.

Time will tell.

Elsewhere...

In the FX, the hawkish Fed announcement pushed the US dollar higher against most majors yesterday. The EURUSD briefly slipped below the 1.15 mark, the USDJPY pushed above the 160 mark and Cable dipped a toe below the 1.33 mark.

Today, the Bank of England (BoE) is expected to maintain rates unchanged thanks to relatively soft inflation data recently suggesting that price pressures in the UK rose less than feared. Maybe strong competition among retailers helped temper price pressures, or perhaps people already dealing with restrictive fiscal policy simply could not stomach higher prices, but the BoE knows that time is ticking toward July’s revision of the energy price cap, which will make inflation figures look very different and much more supportive of a rate hike.

The good news is that oil prices keep pulling lower into the scheduled signing of a peace deal between the US and Iran. US crude is trading below the $75pb mark this morning despite Israel’s refusal to end the war in Lebanon.

The bad news is that the latest ECB and Fed decisions showed that policymakers do not necessarily rely on the idea that lower oil prices will immediately cool inflationary pressures.

For markets, a combination of monetary policy tightening and higher yields is not supportive of valuations.

Big Tech came out unscathed from the latest monetary tightening cycle thanks to the nascent AI boom and ample free cash flow that helped navigate higher rates.

Today, Big Tech is taking on debt to finance the massive AI buildout, making it more vulnerable to rising borrowing costs.

Alas, investors seem little concerned about the latter at the moment. At current valuations, and amid rising bubble concerns, some investors prefer rotating into bonds. This week, Nvidia successfully placed $25bn of bonds, up from the $20bn initially considered.

More broadly, Big Tech has become one of the largest borrowers in corporate debt markets, issuing roughly $120bn of bonds in 2025 and already more than $150bn so far this year to fund the AI buildout.

Is this a good thing?

On one hand, the surge in Big Tech issuance confirms that investors remain willing to finance the massive AI buildout. On the other, it highlights the growing dependence of the sector on interest rates, and future revenue growth to justify an increasingly debt-funded investment cycle.

Conclusion: the AI revenue had better grow fast.