On June 22, 2026, the policy signals released by the Federal Reserve became the focus of global financial markets. At the June policy meeting, the new chairman, Kevin Warsh, removed the previous dovish guidance and revised the dual mandate of employment and price stability to price stability, releasing a very strong hawkish signal and triggering high market attention to interest rate hikes.

However, it also has its own unique non-hawkish wording, such as the dot plot being drawn with a pencil with an eraser and the establishment of five working groups to explore good internal Fed mechanisms, rather than simply rigidly using traditional inflation data that cannot reflect the current situation in a timely manner.

Hawkish sentiment sets tone: Expectations for interest rate hikes before the end of 2026 are rising.

In his first monetary policy meeting as the new Federal Reserve Chairman, Kevin Warsh stated that the committee would be committed to achieving price stability, prompting Wall Street to quickly enter a prudent assessment mode, focusing on the potential cascading market shocks that could be triggered by at least one interest rate hike in 2026.

Meanwhile, most members of the Federal Open Market Committee (FOMC) clearly favor completing at least one round of interest rate hikes before the end of 2026, with the core objective of curbing the current rapid rise in inflation. This can be seen from the dot plot, and interest rate futures also reacted quickly, revising the probability of a rate hike at the end of 2026 from 60% to nearly 90%.

This statement was not unfounded, but rather stemmed from the recent significant rebound in inflation data and the Federal Reserve's firm commitment to price stability.

Inflation driver: Geopolitical conflicts trigger surge in oil prices

The core reason why Warsh and other FOMC members are so wary of this round of inflation rebound is the abnormal fluctuations in crude oil prices caused by the geopolitical game between the US and Iran in the first half of this year.

The Strait of Hormuz, a vital global oil shipping route, was briefly closed due to conflict. This route carries a quarter of the world's seaborne crude oil traffic. Iran's frequent interference with commercial shipping to gain leverage in peace talks directly pushed West Texas Intermediate crude oil to a high of $113 per barrel in April, a 97% increase from its opening price at the beginning of 2026.

The surge in crude oil prices has been transmitted through the industrial chain, ultimately driving up the retail prices of all categories of goods. This impact has gradually become apparent in macroeconomic data.

The Rise of AI: A Key Variable Affecting Prices

In addition to energy-driven cost pressures, the development trend of AI technology may also become a key variable affecting inflation. The two scenarios have drastically different paths in influencing inflation, further highlighting the complexity of the current inflationary environment.

Scenario 1: If AI technology is rapidly implemented and significantly improves the production efficiency of all industries, it will offset inflationary risks from the supply side. In other words, rapid AI development combined with increased production efficiency will boost the economy and suppress inflationary pressures.

Scenario 2: If AI technology fails to effectively stimulate economic growth and instead leads to resource misallocation and insufficient supply, it will further amplify inflationary pressures: that is, AI's inability to stimulate the economy + exacerbating insufficient supply and resource misallocation—pushing up inflation stickiness.

The Federal Reserve is shifting its focus, creating a new department to address traditional data issues.

Following the June policy meeting, Warsh stated in an official statement that the policymaking team would prioritize price stability and push the CPI back to the 2% target range. In May, the annualized year-on-year increase in the US Consumer Price Index (CPI) rose to 4.2%, far exceeding the Fed's 2% annual inflation target. This was the first time the CPI had surpassed the 4% mark since April 2023, when the Fed was in the midst of a period of intensive interest rate hikes.

However, as is well known, the core PCE is based on data from the previous month, and because the data collection cannot reflect the current situation, Walsh proposed to accelerate the reform of the mechanism and the reshaping of the policy framework. Five special working groups have been established to conduct in-depth reviews on policy communication mechanisms, balance sheet size control, economic data application system, productivity and employment linkage mechanism, and inflation control framework.

This also means that various departments will publish articles related to the content they are responsible for in the near future, and Walsh will use this new framework to sort out monetary policy, which is also to find theoretical support for his actions. The theoretical support for Roosevelt's New Deal intervention in the market economy in 1940 was Keynes's general theory. In fact, the task of many economists is to help the government find reasonable reasons to intervene in the market.

Turning point signal: Falling oil prices open up room for policy adjustments

However, the current market environment is not without hope, and there is still room for adjustment in the Federal Reserve's policy stance.

The key point is that both CPI and PPI are lagging indicators, which can only reflect past economic fundamentals and cannot reflect real-time changes in the current market.

An important positive sign is that the US and Iran have recently reached a peace agreement, and WTI oil prices have reached $75, which is very close to the pre-war price of $68.

Although it will take some time for the effects of falling oil prices to be transmitted to inflation indicators, as long as crude oil prices continue to remain at their current low levels, Warsh and the Federal Reserve Board may see a significant shift in their policy stance in a few months.

In summary, the probability of an interest rate hike is lower than expected, and the market needs to take a balanced view.

Considering all factors, the actual probability of an interest rate hike in 2026 is far lower than the signal released in the latest economic forecast report from the Federal Reserve.

Although CME interest rate futures indicate a greater than 90% probability of an interest rate hike by the end of the year, given the Federal Reserve's proposed adjustments to its inflation control framework, it is unlikely to act rashly before releasing theoretical guidance. Meanwhile, recent US Treasury yields have shown a pattern of rising short-term yields and stagflation at long-term yields, suggesting that the market is not worried about long-term inflation.

For the market, while the Fed's hawkish stance certainly warrants caution, the lagging nature of inflation data, the downward trend in oil prices, and the potential variables of AI technology development all leave room for policy adjustments and provide investors with a multi-dimensional perspective to examine the market.

Appendix: There are three core reasons why interest rate hikes suppress the market:

Residents need to use more of their income to repay various types of credit, resulting in a corresponding reduction in disposable consumption funds;

Corporate financing costs are rising in tandem with tightening credit lines, which is squeezing the space for expanding investment and production capacity.

With yields on risk-free assets such as cash and US Treasury bonds rising in an environment of interest rate hikes, their cost-effectiveness has improved, and investors' willingness to flock to growth-risk assets such as stocks has cooled significantly.

With corporate profitability hampered by the first two factors, in the long run, the core driver of stock prices is corporate profitability, which explains the suppressive effect of interest rate hikes on the stock market.