By Lewis Krauskopf
NEW YORK, June 12 (Reuters) - A suddenly rocky U.S. stock market confronts a potential wildcard next week: A newly led Federal Reserve at a time investors are worried that interest rate hikes to fight inflation could dampen enthusiasm for equities.
Investors are eager to see how Fed Chair Kevin Warsh handles his first meeting as head of the U.S. central bank, one of Wall Street's most closely watched events that frequently leads to sharp moves in asset prices.
"As we've seen at times
in the past, it can be a bit of a challenge for a newer Fed chief to get the message right, to stick the landing," said Jim Baird, chief investment officer with Plante Moran Financial Advisors. "The market is watching and parsing every word that's said."
After torrid runs, major stock indexes have cooled off so far this month. The benchmark S&P 500 was last down nearly 3% from its record closing high from June 2. The Nasdaq Composite had slipped almost 5% from its high that day.
Wall Street's "fear gauge," the Cboe Volatility Index this week hit two-month highs, while the major averages were seeing significant daily swings, including sharp gains on Thursday.
Technology shares have led the declines, just as they drove indexes higher in scorching rallies off the market's low for the year in late March. Investors are wary of an overheated rally amid soaring optimism about AI-driven profits, despite risks that include developments in the Middle East war and its impact on energy prices and inflation.
Investors also will closely follow trading in Elon Musk's SpaceX, set to make its market debut on Friday after its massive initial public offering.
The S&P 500 remains up 8% this year, while the Nasdaq is up 11%.
FED LIKELY ON HOLD, FOR NOW
Any potential interest-rate hike by the Fed could present headwinds for equities by raising borrowing costs for consumers and businesses, while also making bonds more competitive investments.
While the Fed is widely expected to hold rates steady when it gives its monetary policy statement on Wednesday, investors will be looking for signs of policymakers' views going forward.
Warsh was picked by President Donald Trump, who railed at the central bank and prior chair Jerome Powell for not cutting rates more to his liking.
But Fed fund futures suggest market expectations that the central bank will increase rates by the end of the year, according to LSEG data.
Economic data this week showed U.S. consumer inflation in May increased at its fastest pace in three years. This, along with recent solid employment data have led investors to think that the Fed will focus on containing inflation, which could mean leaning more toward rate hikes.
"Trying to understand the reaction function of this new administration at the Fed is going to be key," said Marvin Loh, senior global macro strategist at State Street. "If we get that type of a hawkish hold, if you will, I think that that would kind of surprise the market."
FED PROJECTIONS, WARSH COMMUNICATION IN FOCUS
As part of the meeting, Fed officials are expected to give projections about the path of interest rates and about the economy, including inflation. Investors will also closely scrutinize Warsh's press conference after the policy decision on Wednesday.
"The biggest thing is will the Fed hold, and what's the language around it?" said Marta Norton, chief investment strategist at retirement and wealth services provider Empower. "How does it describe inflation?"
Investors will also want to learn Warsh's policy goals and how he might seek to reshape the Fed.
For example, Warsh has expressed a desire to pare the Fed's $6.7 trillion balance sheet, which could cause ripples in markets.
Warsh might also seek to change the way the Fed communicates or gives guidance about policy, investors said.
"If we are more data dependent and we're not getting visibility from the Fed of what they want to do, then I would think every economic release gets a little bit more attention and can create a little bit more volatility than we've seen over the last few years," said Jeff Given, head of developed-market fixed income at Manulife Investment Management.
(Reporting by Lewis Krauskopf; Editing by David Gregorio)
