It has been said that the market likes to “test” a new Fed chair. However, recently appointed Fed chair, Kevin Warsh, has turned the tables on the market. Chair Warsh has declared that he does not believe in providing forward guidance and has decided not to contribute his own opinion to the famous “dot plot.” He has essentially told the market that it needs to think for itself.
Taking Mr. Warsh at his word, it doesn’t take a genius to see that absent a sudden and drastic change in the inflation data, the Warsh-led Fed is going to be primed to raise rates. We can clearly see that inflation has been above the Fed’s 2% bogey for over 5 years now and Mr. Warsh himself said at Jackson Hole that the Fed should not rely on isolated data points because “trends matter most.” Five years is plenty of time to establish a trend.
This is in stark contrast to the previous chair, Jerome Powell, who bent over backwards to guide the market as to what the Fed’s next move would be. Warsh’s strategy can almost be seen as a criticism of Powell who ironically still serves on the Fed.
At the Fed’s September meeting, the committee voted to raise rates and Chair Warsh’s comments on persistent inflation reinforced expectations that this may be the beginning of a rate hiking cycle. Warsh said the “plain fact is that inflation is too high, and has been for too long,” adding that recent inflation readings have not convinced him that underlying trends have meaningfully improved. The hawkish commentary was also supported by the latest dot plot, which showed 16 of 18 Fed officials expecting at least one additional rate hike this year.
The new direction in the Fed has had a significant impact on the stock market. In light of the more hawkish stance, several areas of the market have been decimated. The “bond proxies” such as utilities and REITs have been particularly hit hard, but there has been broad-based weakness although by glancing at the large cap indices it would not be obvious. The median S&P 500 stock has noticeably underperformed the index since Chair Warsh’s speech at Jackson Hole.
The abrupt decline in utilities and REITs is very understandable considering the rise in rates as their yields become less attractive vs bonds. Additionally, the home building sector has been severely punished as a sharp move higher in mortgage rates has put a chill on the housing market. Small caps have also relatively underperformed the S&P 500 as smaller companies tend to be more exposed to increased costs of debt and a potential slowing of the economy from higher rates. Finally, gold has suffered through a sharp decline as higher rates cause non-income generating assets to become less attractive as well as the impact from a stronger US dollar.
The large cap indices have bucked this negative trend as some investors have decided to move their cash to the relative safety of the mega caps. This also includes the AI trade which has much overlap with the mega-cap group and provides a secular bull story that is not as dependent on interest rates.
Date of report: October 9th of 2026