We previewed three scenarios for Kevin Warsh's first FOMC meeting. The market — and this newsletter — leaned toward a careful hold with a constructive tone. Instead, Warsh came out swinging. Yesterday the Fed held the funds rate unanimously at 3.50–3.75%, but everything around the number was unmistakably hawkish: the easing bias was stripped, the policy statement was slashed from 341 words to just 130, and the new dot plot penciled in a 2026 rate hike. We flagged this as our lowest-probability path. It's the one that happened — and it's worth owning that plainly.

The mechanics of the hawkish turn: the median end-2026 projection for the fed funds rate jumped to 3.8%, up from 3.4% in March — with nine of 18 participants now seeing at least one hike this year. Officials lifted their 2026 headline inflation forecast to 3.6% and core to 3.3% (both up sharply from 2.7% in March), reflecting the energy shock. And in a striking break from two decades of Fed practice, Warsh declined to submit his own dot at all, calling the tool unhelpful and announcing five task forces to review Fed communications, the balance sheet, data, and the inflation framework.

The bond market read it instantly. As Renaissance Macro's Neil Dutta put it, "Warsh has come out swinging with a short statement and he did not submit a forecast." The committee's message: the energy-driven inflation that pushed CPI to 4.2% is not something this Fed will look through, the resilient labor market gives it no reason to ease, and the path of least resistance is now up, not down. Prediction markets, which had been split, now see a July hike as more likely than a cut.

Here is the part that lands directly on a rate sheet: mortgage rates spiked the moment the dots hit, erasing a full week of peace-deal progress in a single afternoon. The dot plot showed the average Fed member now sees the funds rate at least 0.25% higher by year-end than they did in March — and that was the first big move. Bonds lost more ground during Warsh's press conference, as traders who'd hoped for a rate-friendly tone got a disciplined, guidance-light chair instead.

Mortgage News Daily reported that lenders raised rates up to three times on Wednesday afternoon, with the top-tier 30-year fixed climbing back to roughly 6.62% — right back to June 10th levels, undoing the entire peace-deal rally. By this morning, the dust has settled slightly: Bankrate's Thursday average sits at 6.51%, NerdWallet and others ranging lower on an APR basis, with the 10-year Treasury near 4.47%. The net of an extraordinary week: oil fell nearly 40% from its peak, a war ended — and mortgage rates are roughly where they started.

So we now have two powerful, opposing forces acting on mortgage rates at the same time. On one side: the end of the war and a 30% oil collapse — unambiguously disinflationary, and over time, a force that pulls rates lower. On the other: a Fed that just stripped its easing bias, raised its inflation forecast, and penciled a hike — telling markets in the clearest possible terms that it will not pre-reward the peace dividend until it shows up in hard data.

For now, the Fed is winning the tug-of-war. The hawkish dots overwhelmed the oil-driven optimism, and rates snapped back. But this is a timing disagreement, not a permanent one. The oil decline is real and it will eventually flow into the inflation numbers — likely the July and August CPI reports. When it does, the Fed's hand changes. The peace dividend isn't cancelled. It's deferred — and the deferral is measured in weeks, not years.

The single most useful thing to understand right now is how a peace deal in the Persian Gulf eventually becomes a lower number on a rate sheet in Michigan. It runs through a five-link chain — and the Fed just put a hold on the middle of it:

Link one is done. But link two takes time — energy price declines feed into the official inflation data with a one-to-two-month lag, so the oil collapse won't fully show up until the July and August CPI reports. And link three just got blocked: rather than acknowledge the coming disinflation, the Fed raised its 2026 inflation forecast to 3.6% and stripped any hint of easing. With the chain broken at link three, links four and five can't fire — which is exactly why mortgage rates rose instead of fell, even as oil cratered.

The key insight for the weeks ahead: watch the data, not the Fed. As CBS framed it, the headlines that move your rate now are more likely to come from the oil market or the Labor Department than from the Fed itself. The next two CPI prints are the real catalysts. If they show the energy decline pulling inflation lower, the bond market will move ahead of the Fed — and rates can fall before Warsh ever says the word "cut."

Lost in the Fed drama: the war that defined 2026 is over. The U.S. and Iran have digitally signed their interim agreement and a U.S. official confirmed the memorandum of understanding has taken effect — extending the ceasefire 60 days and committing to reopen the Strait of Hormuz and lift sanctions on Iranian oil — with the formal signing ceremony set for tomorrow, Friday June 19, in Switzerland. Every thread this newsletter has tracked for four months — the oil spike, the 4.2% CPI, the frozen Fed — traces back to the closure of that one waterway. It is reopening. That is genuinely historic, and genuinely good for the rate outlook over the back half of the year.

But the transition is not clean. Iran's foreign ministry spokesman Baghaei has fired warnings over missiles, uranium, and Hormuz transit fees even after the MOU took effect, and Tehran drew a red line that an attack on Lebanon would void the deal. Mines still need clearing from the Strait, idled production must restart, and damaged Gulf facilities need repair — industry officials say a full recovery in Iranian production and refining could take weeks, months, or even years. The IEA, meanwhile, is now warning of a 2027 supply glut, projecting global supply to rise about 8 million barrels a day against demand growth of just 2 million. The war premium is leaving the oil price, but the physical normalization will be gradual. That's the deferred-not-cancelled dynamic again, this time on the supply side.