Markets expect Wednesday’s release of the latest FOMC meeting minutes to confirm the recent hawkish pivot. The market already expects the Fed to hike rates, leaving little room for a hawkish surprise. That creates greater downside risk if the minutes reveal a more dovish tone.

At first glance, Fed Chair Kevin Warsh’s rhetoric might seem unusual for someone appointed by the notoriously dovish US President Donald Trump. His predecessor, Jerome Powell, cut rates six times over two years and drew criticism from Trump for not easing further. The Administration still calls for lower rates, and Warsh is only one of twelve voting members. However, another explanation could lie behind his hawkish pivot.

Warsh Might Not Actually Want to Raise Rates

Given his appointment by Trump, Warsh might worry that markets see him as more dovish than he actually is. That could explain his comments at the ECB’s Forum in Sintra, where he suggested markets underestimated his commitment to fighting inflation. Rather than signalling a Fed pivot, he may simply be trying to change the perception created during his confirmation hearings. Inexperienced Fed Chairs often communicate one message while markets interpret another.

More importantly, central bank policy depends heavily on shaping market expectations. Inflation depends not only on current conditions but also on what consumers and investors expect. If the central bank maintains credibility, it can anchor inflation expectations and reduce price pressures. That allows policymakers to influence markets through communication alone. Simply signalling a willingness to raise rates can help contain inflation.

It’s Actually About Boosting the Economy

Warsh may sound hawkish to lower inflation expectations without actually raising rates. Months of White House pressure for lower rates may have weakened the Fed’s anti-inflation credibility. By taking a firmer stance than Trump, Warsh could ease inflation expectations, especially while uncertainty around energy prices and the Strait of Hormuz continues.

Whether the minutes confirm that strategy remains unclear. However, other FOMC members may sound less hawkish than Warsh has recently. Markets have only a few ways to interpret the minutes as hawkish but many ways to view them as dovish. A dovish interpretation would likely weigh on the dollar while supporting gold.

The Odds Have to Give

After taking the helm at the Fed, Warsh shifted away from forward guidance and adopted a more data-dependent approach. Since then, several key data releases have followed, including last week’s disappointing NFP report. Despite that, markets still assign roughly an 80% probability to a Fed rate hike by year-end.

This could suggest that markets remain unconvinced by Warsh’s message and still expect higher inflation to force the Fed into raising rates. It could also reflect simple inertia, as traders wait for clearer insight into the FOMC’s thinking before changing their outlook. Wednesday’s minutes could provide that insight and significantly reshape expectations for US interest rates.