(Bloomberg) — A relentless run of uncertainty, from war to tariff fights to inflation that refuses to die, has challenged investors this year. Now they have to balance another risk: A Federal Reserve that won’t tell them what it’s thinking.
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The issue came to a head this week after Fed Chairman Kevin Warsh finished his press conference without giving any guidance on whether or when the central bank will raise interest rates to combat stubbornly rising prices. It was a particularly curious choice since three of the 12 members on the Federal Reserve Open Market Committee voted for immediate rate hikes. The FOMC is typically unanimous in its decisions or very close to it.
Traders were clearly spooked, triggering a wild final hour of trading on Wednesday. The S&P 500 Index plunged to its worst selloff on a Fed decision day since December 2024. The yield on 10-year Treasury bonds leaped to the highest level since January 2025. And the Cboe Volatility Index, or VIX, vaulted above 20, a level that indicates increased fear in the market.
“I was really shocked at how poorly I thought that press conference went,” said Marta Norton, chief investment strategist at Empower.
Wall Street pros were merciless in their reviews of Warsh’s performance, saying that Fed guidance helped reduce market volatility by guiding traders to where the Fed was thinking. Now, investors want a “higher uncertainty premium” to cover the risk that the central bank waits too long to act on inflation, according to Karl Schamotta, chief market strategist at Corpay. “Some might call this a ‘moron risk premium,’ but I could not possibly comment,” he wrote in a note to clients.
“The market is being forced to factor in a confluence of factors without an anchoring thesis, which has been the Fed’s forward guidance,” said Joe Gilbert, portfolio manager at Integrity Asset Management.
Warsh is taking the opposite approach, looking for markets to help guide the central bank. Or in his words, investors are “learning to play the ball, not the referee.”
The problem with Warsh’s sports analogy, investors say, is the macro forces influencing stock prices are increasingly erratic, making it extremely difficult to simply “play the ball.” For example, President Donald Trump is trying to rebuild his tariff wall just as the war in Iran causes wild fluctuations in oil prices and inflation expectations. In light of the Fed’s role in setting short-term interest rates in response to these and other factors, the decision to offer no guidance is seen as exacerbating risks in an already volatile market.
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“You’re also a player on the court, you’re not just a referee,” Norton said.
That volatility was on display at the end of this week.
After tumbling Wednesday afternoon, the S&P 500 rallied Thursday and early Friday, then reversed direction to fall into the red before reversing again and ending up. The moves were largely driven by chip stocks, which have been spurring the market all year. The Philadelphia Stock Exchange Semiconductor Index, or SOX, sank 5.3% on Wednesday, soared 8.2% on Thursday for its best day since April 2025, then jumped another 5% at the start of trading Friday before giving up its gain and turning negative in less than an hour, and eventually closing barely in the green.
The stock market has historically tested new Fed chairs. But Warsh’s performance on Wednesday was shaky enough to make the next interest rate decision and the Fed’s Jackson Hole symposium at the end of August highly volatile single-day events for equities, Norton said. And she’s hardly alone.
Investors should “get used to uncertainty,” Stuart Kaiser, head of US equity trading strategy at Citigroup Global Markets, wrote in a note to clients on Thursday. “Looking ahead, less guidance from the Fed likely means that this is a more regular occurrence,” he added. Kaiser encouraged investors to use Russell 2000 options “as the best way to trade” that uncertainty and volatility for future central bank meetings.
Traders have been aggressively buying up put spreads on the iShares Russell 2000 ETF in recent weeks as hedges for this week’s FOMC meeting and Jackson Hole. Looking ahead to the next Fed meeting in September, as of Friday afternoon investors were pricing in a 65% chance of a rate hike. The probability of that happening and the uncertainty attached to it are likely to weigh on stocks.
“Geopolitically, oil and rates will trade in a higher band than before, and conversely stocks will trade at lower multiples,” Integrity Asset Management’s Gilbert said.
Another issue with the monetary policy uncertainty is that rising yields cause correlations, which have recently been plumbing record lows, to race higher. “The risk is that we end up in a 2022-like scenario in which correlations spike across asset classes,” said Brian Nick, head of portfolio strategy at Newedge Wealth.
In 2022, an aggressive Fed rate-hiking cycle to combat runaway inflation ushered in a nasty bear market for stocks. The S&P 500 tumbled roughly 25% from its peak in January to a trough in October and ended the year down 19.4%, its worst performance since the global financial crisis in 2008.
Of course, a bear market was far from investors minds in the days after Warsh’s comments. Blockbuster results from Microsoft Corp. helped lift investor expectations that the buildout of AI infrastructure and related productivity gains will keep pushing stocks higher. And energy shares, the best performing sector in the S&P 500 this year, continued to rally as oil prices remain high.
Meanwhile, some Fed officials have decided they need to explain their thinking even if the chairman won’t. The three dissenters at this week’s meeting put out statements on Friday morning to explain why they believe the central bank needs to raise interest rates now.
“To manage against the risk that high inflation could become entrenched, I would rather tighten policy incrementally as we gather more data on the path of inflation and employment,” Minneapolis Fed President Neel Kashkari said in his statement. “If inflation remains elevated, in my view, a potential series of small policy moves would be better than waiting and eventually concluding that even bolder actions were necessary.”
All of which brings the market risks into clearer view. The problem for Wall Street is the Fed’s new leader isn’t going to approach the issue with the same level of transparency. So investors in both the bond and stock markets are left trying to parse every word Warsh says in an effort to figure out the path for interest rates from here.
“Every time he steps up to a mic, I think the markets are gonna wonder what’s going on,” Empower’s Norton said. “That’s not to denigrate him. I think a lot of what he says is really valuable, and I’m excited about how this all turns out. I just think the markets need a better performance than what we got.”
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