The June Federal Open Market Committee (FOMC) decision to keep the target range for the federal funds rate unchanged at 3½ to 3¾ was not a surprise. But the statement—significantly shorter than in April—tilted hawkish, with the committee reaffirming its intention to deliver price stability amid still-elevated inflation, while barely mentioning the employment leg of the dual mandate. Moreover, in the Summary of Economic Projections (SEP), nine policymakers still projected at least one rate hike for 2026.

The response in financial markets was consistent with a perceived monetary policy tightening. Two-year nominal yields jumped about 15 basis points, on net, driven by an even larger move in 2-year real rates. Equity prices fell and credit spreads widened.

It is always difficult to implement changes in central banking, a circle that is conservative by nature. But the world is changing rapidly. Geopolitics, the AI capex boom and the need for supply chain and energy resilience all point to inflationary pressures in the short term. A new Federal Reserve chair provides an opportunity for a lean against the inertia present in the statement, communication and decision making.

A lot has been written about the first FOMC meeting under Chair Kevin Warsh, so I will focus on three main takeaways.

First: Reimagining Communication

For many years, forward guidance served a clear purpose: when the policy rate hit zero during the 2008 financial crisis, the Fed used forward guidance to push down borrowing costs for firms and households. Today, the macroeconomic backdrop has changed. The priority of the Fed is not to fight deflation anymore: amid a growing affordability crisis, high inflation tops the list of concerns of consumers and can influence the outcome of elections.

In addition, forward guidance has been perceived for years by investors as a form of soft commitment by the Fed. In a world of persistent inflation and heightened uncertainty, anchoring markets to the committee’s modal forecast is ineffective, if not counterproductive.

The decision by the committee to drop forward guidance from the statement is a welcome step in the direction of incentivizing investors to price different scenarios and macroeconomic outcomes. It will also prevent the Fed from walking into FOMC meetings cornered by expectations of its own making.

“Financial market prices are probably the most important source of information to guide central bankers. But when all the financial markets are doing is reflecting back what we've said, then we're taking the most important source of information and we're being blind to it. I'd like us to create a system where those blinders come off, where markets are following data that they efficiently think is reliable,” Chair Warsh said at the June 17 press conference.

But markets still need to understand how the Fed processes information when deciding whether to adjust its monetary policy tools—the so-called reaction function. This is different from forward guidance. A clear reaction function explains how the committee weighs the dual mandate, assesses distance from objectives, and gauges the relative speed of convergence—without explicit guidance about the next policy decision. This kind of transparency remains essential, and it does enhance accountability to Congress and the public. It doesn't necessarily tie the Fed's hands; it clarifies how those hands will move in response to incoming information.

Second: Five Task Forces and the Three That Matter Most

Chair Warsh announced five new task forces to address communication, inflation frameworks, balance sheet policy, and other priorities. Without details on who will participate, what outcomes are expected, and how consensus will get managed, these are signals right now rather than solutions. But three bear close attention.

First, communication is a priority. The median dot plots have become focal points for markets rather than tools for understanding policy. Scenario analysis could replace the modal forecast and incentivize investors to think through different outcomes, associated probabilities, and policy paths. The question is: which scenarios, and who sets the odds of different scenarios? These challenges should not be an excuse to avoid tough decisions. Lastly, Chair Warsh suggested he may stop holding press conferences after every meeting, reserving them for when there is something substantive to say. How will they fit into the new communication framework and how will they be used as a signal about policy?

Second, with inflation now 5 years above target, a reassessment of the inflation framework seems overdue, though the scope remains unclear. For example, in a world that appears more prone to supply shocks and persistent inflationary impulses, is there a need for a full rethinking of the framework—like the Fed did with the now-abandoned flexible average inflation targeting? Chair Warsh appeared to suggest there was no reason to revisit the 2% target itself. Indeed, an immediate move to say a 3% target may damage the Fed credibility, because it could be perceived as attempting to cheat its way out of high inflation. But would a symmetric range around the 2% target introduce flexibility amid high macro and policy uncertainty? Should the Fed still look at PCE, or do new measures matter more in an age of rapid technological change? Finally, should the Fed continue to emphasize stability of market-based long-term inflation expectations (which barely moved during past 5 years of inflation overshoot) or should it focus more on survey measures of consumers and firms which convey something about the political economy of inflation?

Third, the balance sheet remains the least transparent piece of the Fed’s toolkit. The central bank needs a clear framework covering objectives, size, composition, market footprint and the relationship to the short-term policy rate.

The statement reaffirmed the committee’s intention to maintain ample reserves in the banking system, so it is unclear whether other frameworks like a return to a corridor as in pre-2008 financial crisis will be considered.

“The second task force, the one on balance sheet policy, will review the benefits and risks of the current ample reserves regime, and the composition of the Fed’s balance sheet. They will assess alternative frameworks for the conduct and operation of monetary policy.” Chair Warsh June 17 prepared remarks.

Equally important is a clear delineation between using the balance sheet for monetary policy versus financial stability. With the U.S. fiscal outlook continuing to deteriorate, a discussion about the lender-of-last-resort function and the use of the balance sheet for financial stability purposes (touching on issues such as objectives, tools, communication) is crucial to maintain independence and avoid financial repression.

Three: The Stealth Easing Question

With inflation 5 years above the Fed 2% target after a series of supply shocks, a hawkish statement, and half of the committee projecting at least a rate hike this year, why did the Fed leave interest rates unchanged? Chair Warsh didn’t provide the answer, leaving investors speculating on internal committee dynamics and the role task forces might play in upcoming decisions. But this disconnect matters.

The practical effect is a stealth easing of monetary policy: steady nominal rates with rising inflation means falling real rates. Financial conditions remain easy amid robust risk appetite. The Fed appears to be betting that productivity gains will offset inflationary pressures while growth remains strong. That bet on accelerating productivity is visible in the SEP: GDP slightly above its longer-run growth rate, unemployment near equilibrium, inflation declining to target by end-2028 as policy rates fall.

The lack of a clearly communicated reaction function sets the stage for more volatility in coming months, so buckle up! Markets now anticipate about 2 hikes by next spring with some market participants Bank of America projecting an even higher three hike cycle before year end. How the conflict in the Middle East will evolve and upcoming economic data will test those assumptions. The Fed has an opportunity, through a transparent reframe of its communications and these task forces, to improve its accountability. Whether Chair Warsh uses it or not, will define policy credibility.

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The Tail

Here is some recent work from the , where we are focused on topics including geoeconomics and fragmentation, AI and innovation, digital finance, monetary and fiscal policy, private credit, and energy markets.

1. The Arc Blog: Central Banks Must Change How They Talk and Act Amid Constant Supply Shocks

2. The Arc Blog: An Era of Weaponized Interdependence Begins

3. The Global Rewire Podcast: Sky-High Uncertainty with Ken Rosen

In a new Andersen Institute White Paper, we argue that the resulting mutual vulnerability—the Cold War logic of Mutually Assured Destruction (MAD), where "destruction" should read as economic disruption—now constrains both sides and prevents further decoupling. That equilibrium does not ensure stability. The baseline is several years of “unstable stability”: a world less integrated than the one we lived in for decades, less decoupled than many fear, and punctuated by flare-ups that resolve through de-escalation rather than victory or settlement.

We map this contest across two stacks: the real economy stack of computing, semiconductors and rare earths (economic MAD, or EMAD) and the financial stack of dollar dominance and digital finance (financial MAD, or FMAD).

U.S. and China Export Restrictions’ Footprint on the Global Corporate Narrative

Note. The figure plots the footprint (% of total mentions) of U.S. Technology (blue line with circles) and China Rare Earth (red line with squares) restrictions on global earning call reports, together with a count of total relevant export restrictions mentions (gray shaded area, right scale).

On the real side of the economy, an LLM analysis of global earnings call reports shows this mutual vulnerability is already coloring the corporate discourse. Chinese export controls surfaced in late 2024 but scaled fast. China’s policy footprint was effectively absent from the global corporate narrative before that; it peaked just below 20% of total discourse after the April 2025 export controls on seven medium-to-heavy rare earths. By the end of 2025, the gap between the two narratives was within single digits of each other.

On the financial side, a form of FMAD has existed for some time. The U.S. dollar dominance and the power to cut entities out of the global U.S. dollar payment system are a first-strike capability. China’s Treasury holdings and the exposure of U.S. interests to its regulatory reach are the second.

Digital finance could tip this balance either way. Portable U.S. dollar-denominated digital assets, the path the U.S. has chosen with the GENIUS Act, could deepen U.S. dollar dominance and erode China’s capital controls. More permeable Chinese capital control would diminish China’s shock absorption capacity and tilt the MAD balance toward Washington. A stronger U.S. hand, in turn, would likely lead to more fragmentation.

A shift in dollar-denominated demand for digital assets toward offshore rails like Tether in a quest to escape the risk of sanctions would do the opposite. That would weaken Washington’s enforcement capacity and, counterintuitively, restraining its hand.

Tether-Circle Market Capitalization Ratio and Fragmentation Events

Note: Dashed vertical lines mark seven fragmentation events. The events are the Russian invasion of Ukraine, the start of Israel's ground operation in Gaza, the 2025 Liberation Day tariffs, U.S. sanctions on Iran's shadow oil fleet, Trump's Greenland tariff threats against Europe, Maduro’s capture, and the start of the U.S.–Iran conflict.

The dynamics of the relative market capitalizations of offshore, unregulated U.S. dollar stablecoins (such as Tether) and onshore, regulated U.S. dollar stablecoins (such as Circle) around fragmentation events is consistent with this idea. Following such events, stablecoin demand shifts offshore, affecting the instrument composition of U.S. dollar global demand without necessarily undermining dollar dominance itself.

Both the U.S. and China, meanwhile, run internally inconsistent policies. The U.S. is closing its door to trade while keeping an open financial account, and China is doing the reverse. These are configurations that are ultimately unsustainable and could erode the very policy arsenals that sustain the MAD equilibrium.

For corporate leaders, the variable that matters most is time. Two clocks are running at once. The first is structural and slow: most analyses assess that neither side can escape its key dependency on the other for several years, which makes mutual vulnerability a reliable planning baseline. The second is unpredictable and can move fast: the policies that hold mutual vulnerability in place are internally inconsistent, and each side’s own contradictions could end the calm sooner than the structural clock implies.

The practical implication is that the multi-year horizon is enough time to plan around but no promise of globalization-era stability. Firms should use it to decide which dependencies to reduce first (and on which side of the divide), sequencing this derisking by where they sit on the fault line. With the end-date uncertain, the payoff comes from adapting early to the new MAD reality.

For investors, the open question is valuations. National security is now an overriding government priority, yet it is unclear whether markets have fully priced in a security risk premium across asset classes and geographies. Markets have tended to read tariffs, digital finance, and financing costs as separate events, while they are in fact interconnected.

For policymakers, especially in Europe and the middle powers that have mostly been bystanders to the rewriting of the global order, the contest has created space. Now the question is whether and how to use it. Middle powers need not pick one block and stay in it. Europe, above all, has the economic weight to matter and the leverage (e.g., single-market access, the power to write rules) to stop being a target for pressure from both sides. They can either act with urgency or spend the next decade as collateral damage.

Over the next several years, the winners will be those who treat this new MAD equilibrium as a condition to plan and optimize around, managing the risks and seizing the opportunities, rather than a disruption to wait out.

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The Tail

Here is some recent work from the , where we are focused on topics including geoeconomics and fragmentation, AI and innovation, digital finance, monetary and fiscal policy, private credit, and energy markets.

1. The Arc Blog: AI Financial Advisors are Blind to Market Opportunity

2. Research: Measuring the Costs of the U.S.-China Trade War of 2022-2025

3. Research: Unintended Consequences of the OCC’s Stablecoin Liquidity Rules

Note: Indexes show standardized options-implied measures of equity (VIX), interest-rate (MOVE) and oil (OVX) market volatility. Source: Bloomberg data.

U.S. equity markets have reached new record highs since March. Credit spreads have retraced to pre-conflict levels. Market-implied volatility has collapsed across asset classes after the jump during the early days of the Middle East conflict. On the surface, this looks like a market at peace with itself. But surfaces can be deceiving.

The Risk-On Case: A Resilient Economy Boosted by AI

The bull case is supported by a U.S. economy that continues to demonstrate remarkable resilience despite huge macro and policy uncertainties. The AI capex boom is accelerating — not just in hyperscaler spending, but in the breadth of the underlying AI ecosystem. First-quarter 2026 earnings have come in very strong and, perhaps most telling, the rally is showing signs of broadening beyond the AI mega-caps that have dominated the equity market for the past couple of years. The AI capex boom and the increase in stock market wealth are boosting demand, while contributing to price pressures.

President Trump has been very effective in managing market communication and expectations for a deal around the negotiations with Iran. By cutting off the left tail of the distribution of possible outcomes, this has mechanically compressed volatility and lifted the mean. Markets have priced in this pattern of behavior, becoming less sensitive to bad news.

And then there are technical factors. The equity rally has been supported by retail investors’ enthusiastic embrace of risk. Institutional investors who were underweight equities and sitting on cash are now chasing performance. As volatility falls, systematic and vol-targeting strategies mechanically add risk exposure. The rally feeds on itself — for now.

Emerging Cracks Beneath the Surface

Look beneath the surface and the picture is somewhat more mixed. Retail investors have become an increasingly dominant force in equity markets. A growing share of options flow — particularly in short-dated contracts, including zero-day-to-expiry (0DTE) options which can offer quick gains — is reportedly linked to retail participants, often trading via apps designed to feel like games and frequently employing leverage. The buy-the-dip mentality has become almost reflexive. That reflexivity works beautifully in a rising market. It can amplify dislocations when the market turns.

Note: Notional options trading volumes by maturity bucket of contracts linked to the four most liquid indices and ETFs, with buckets defined by time to expiration. Source: IMF April 2026 Global Financial Stability Report (GFSR).

The most consequential risk is the inflation-monetary policy nexus. Prediction markets assign very low odds to a reopening of the Strait of Hormuz by the end of June. Investors are pricing Brent at roughly $85 per barrel through year-end. With the inflation outlook darkening, investors have now fully repriced Fed expectations: not only are cuts off the table, but a 25-basis-point hike is now anticipated — nearly 100 basis points higher than where the policy path was priced in early March. This poses a challenge to incoming Federal Reserve Chairman Kevin Warsh, who was initially expected to keep rates low.

And markets anticipate the 10-year Treasury yield to reach about 5.30% five years from now, some 80 basis points above current levels. This is a materially different interest-rate backdrop than the one that has supported the rally in risk assets.

Source: Bloomberg data.

Importantly, this is not another cyclical inflation shock. The geopolitical environment has changed, and the inflationary pressures building in the system are structural due to accelerating financial and economic fragmentation together with the costs of building supply chain resilience.

The Deeper AI Macro Bet — and the Question Worth Asking

What financial markets are pricing is a very large, very concentrated macro bet on AI adoption and the productivity gains it will generate. The S&P 500 carries significant exposure to hyperscalers and the broader AI ecosystem. That concentration is amplified by a circularity of revenues and earnings as well as by exposure to the funding structures of AI capex and data centers.

Imminent mega-IPOs — SpaceX, Anthropic, and OpenAI — will test capital markets’ capacity to absorb deals of extraordinary scale. If investors rotate out of existing holdings to access these offerings, concentration risk will rise further.

It will also test the seemingly inexhaustible appetite for risk by retail investors. Today, retail investors, especially younger generations, trade directly from their phone, often via commission-free apps with game-like features and easy access to leverage. Many also participate in social media investing communities on platforms such as Discord, Reddit, and X, where investment ideas can spread rapidly. Their portfolio set now extends to prediction markets, crypto and other digital assets, meme stocks, leveraged ETFs, short-dated options, and other esoteric instruments.

The return on risk assets in the years ahead will ultimately boil down to how the tug of war between geoeconomics and AI will play out, and whether the timing of AI productivity gains implicitly embedded in earnings growth expectations and asset prices will be validated by the actual pace of adoption by firms and consumers.

History has a consistent message about technology-driven financial booms: markets tend to run well ahead of the underlying reality of technology adoption and productivity realization. The AI story may be different this time in scale and speed. But the pattern of markets pricing perfection, but colliding eventually with a messier, slower, more uneven reality is one of the most durable regularities in financial history.

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The Tail

Here is some recent work from the , where we are focused on topics including geoeconomics and fragmentation, AI and innovation, digital finance, monetary and fiscal policy, private credit, and energy markets.

1. Global Rewire Podcast: Europe’s Existential Pivot with Jeanna Smialek

2. The Arc Blog: Six-Month Earnings Reporting Could Have More Costs Than Savings for Large Companies

3. Research: Monetary Policy Strategy for Poets: The Case of Uncertain Inflation Persistence

Note: Yields normalized to 100 on February 27, 2026. Source: Bloomberg data.

There is a well-known pattern in the history of financial markets: investors are exceptional at pricing the knowable and likely, but terrible at recognizing when the world fundamentally shifts. We are living in that moment now.

We are witnessing a structural recalibration of the global order—a regime change driven not by a single shock, but by multiple factors playing out simultaneously. The U.S. is rewriting the rules of global trade and finance. Globalization as we knew it is effectively over, which means the disinflationary forces that anchored inflation and interest rates for decades are now gone. An AI capex boom is creating unprecedented demand for physical assets, commodities and energy. Governments are being forced to prioritize supply-chain resilience and security in ways unseen since the Cold War.

Markets are not good at identifying inflection points in real time. We extrapolate backward, pricing in yesterday’s regime until the evidence becomes overwhelming. By then, capital has been misallocated and policymakers are playing catch-up. The global sell-off in rates in recent days should be evaluated in this context.

The Middle East Conflict Crystallizes a New Reality

The Middle East conflict is forcing investors to price a fragmenting world—not as an abstract possibility, but as an unfolding reality with immediate implications for asset prices and monetary policy.

Government bonds sold off across the developed world in mid-May, reflecting in part a reassessment of outlook for monetary policy. The U.S. economy remains resilient; first-quarter earnings were blockbuster with double-digit growth expected this year, and consumers kept spending. Against this backdrop, keeping central bank policy rates unchanged amounts to a stealth easing as inflation rises and real rates mechanically decline.

What is driving the sell-off is the realization that priorities in this new regime are different, and they come with a cost. The conflict has accelerated a reordering from efficiency (just-in-time inventory) to resiliency (just in case inventory management, which can turn into hoarding under stress). The weaponization of choke points along supply chains—from AI to rare earths to oil and other commodities—will be a focal point in the future.

This pivot has potentially significant inflationary implications. Look at the turmoil in energy and commodity markets: Brent-WTI spreads are wide and volatile, as are spreads along the refining stack. Shipping routes are under threat, and disruptions in the aluminum industry persist. The risk is that these frictions cause not just elevated prices and volatility but eventually shortages, especially as the Strait of Hormuz remains closed.

Source: Bloomberg data.

Inflation Revives

U.S. inflation has remained stubbornly above target since the pandemic and, with the world facing yet another supply shock, structural forces are kicking in. Investors no longer expect Federal Reserve rate cuts; market pricing now reflects a potential rate hike by mid-2027. That’s a significant recalibration from early March.

The AI capex boom is inflationary in the short term: shortages of skilled labor, rising semiconductor demand, and surging energy needs are making their way into inflation measures. Will it be disinflationary medium-term as AI services become competitive? Perhaps. But the near-term trajectory is likely upward.

A more troubling observation is that mercantilist policies—direct government management of the economy beyond tariffs—are gaining traction globally. Fiscal priorities are shifting toward defense and infrastructure across advanced countries, requiring significant financing and likely to be inflationary.

The Bond Market Speaks

In addition to a reassessment of the outlook for monetary policy, the sharp rise in long-term interest rates appears to be driven by higher term premiums—a reflection of both higher inflation uncertainty and fiscal concerns.

Note: Term premium measures the extra compensation investors demand for holding a long-term bond. Source: Bloomberg data; Federal Reserve Bank of New York.

What makes this moment challenging for markets and policymakers is “Knightian uncertainty”—a situation where the probability of possible outcomes is not quantifiable. Financial conditions are easy and financial markets, though fragmented, can still transmit shocks globally. Central bank communication becomes harder. Here is an example of the challenges from the FOMC April 2026 minutes:

“With regard to the outlook for monetary policy, participants generally judged that the continued elevated inflation readings together with uncertainty related to the duration and economic implications of the Middle East conflict could necessitate maintaining the current policy stance for longer than previously anticipated. […] A majority of participants highlighted, however, that some policy firming would likely become appropriate if inflation were to continue to run persistently above 2 percent.”

The Challenges Ahead

Diversification becomes paramount as the old playbook of capital allocation based on seamless global linkages and tight relationships between markets has been overthrown.

Investors need to think about which assets benefit from resilience-focused policies and which perform well in a world of elevated inflation, higher rates, and larger security premiums.

Interpreting asset price signals is critical. Valuations are stretched in equities and credit, and concerns about private credit continue to mount. AI euphoria continues even questions about the risk of a tech-driven bubble grow. At a time when experts abound in social media, the lessons of history can help separate the signal from the noise.

The pricing of the new world is only starting. The question is whether it happens smoothly or in a nonlinear, disruptive way. History suggests regimes don’t change quietly. The recent sell-off in global yields could be just the opening chapter.

The Tail

Here is some recent work from the , where we are focused on topics including geoeconomics and fragmentation, AI and innovation, digital finance, monetary and fiscal policy, private credit, and energy markets.

1. Op-Ed: Higher inflation is on the way. The Fed needs to make this clear before it raises rates.

2. Op-Ed: No Fed, no safety net: Why private credit’s first real recession will be its moment of truth

3. Research: Digital Finance in a Geopolitically Fragmented World