In 6 Words, Fed Governor Lisa Cook Issued a Stark Warning to Wall Street

This week is a big one for the Federal Reserve and Wall Street, as Kevin Warsh is overseeing his first major meeting as the new Fed chair.

It's a particularly contentious time for the Fed, as inflation continues to surge while the S&P 500 (SNPINDEX: ^GSPC), Nasdaq Composite (NASDAQINDEX: ^IXIC), and Dow Jones Industrial Average (DJINDICES: ^DJI) have all hit record highs in recent weeks.

All eyes will be on the Federal Open Market Committee to see what this might mean for interest rates, and Federal Reserve Governor Lisa Cook recently offered a few words that could spell trouble for Wall Street.

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Inflation puts the Fed in a tough place

The war in Iran has caused energy prices to spike, which is the driving force behind the recent surge in inflation. So far, the Fed has taken a wait-and-see approach by leaving interest rates unchanged.

In late March, during a talk at Harvard University, then-Fed Chair Jerome Powell noted that the central bank was in a tough position trying to balance inflation and the unemployment rate. Lower interest rates tend to help bolster employment, while higher rates can ease surging inflation.

Since then, though, the U.S. labor market has shown unexpected resiliency, adding 172,000 jobs in May and outperforming Wall Street's forecasts. At the same time, inflation has increased for the third month in a row, up 4.2% over the past 12 months and reaching a new three-year high.

This trend gives the Fed more of a reason to focus on inflation over unemployment, and Cook warned that an interest rate increase is on the table.

"I am prepared to raise rates," she said during a forum at the Stanford Institute for Economic Policy Research in late May. Cook added that while she expects to keep rates steady, inflation is "clearly moving in the wrong direction" and that a rate increase could be necessary if it doesn't cool soon.

What should you do with your investments?

To be clear, this doesn't guarantee that a rate increase is coming. Much of the Fed's future policies will be shaped by the war in Iran and energy prices, and if the war ends soon, inflation could cool on its own.

As of this writing, the CME Group's FedWatch Tool, which aims to estimate the probability of future rate moves based on 30-day Fed funds futures contracts, predicts a 58% chance of a rate hike by December and a 42% chance rates will remain unchanged.

Rate increases can put a damper on market gains, as some companies scale back expansion plans when borrowing becomes more expensive. That said, the Fed's rate decision shouldn't change your long-term strategy. Healthy stocks will continue to thrive over time, and that's far more important than the market's short-term performance.

The best thing you can do right now is double-check that all of your stocks have solid fundamentals and are well positioned to weather volatility. With the right investments, you can rest easier knowing your portfolio is built to outlast any short-term turbulence.

Katie Brockman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends CME Group. The Motley Fool has a disclosure policy.