It’s a new Fed for a new world. And one in which the man running it has an aggressive agenda that he has already started implementing. His dislike of transparency will again show up in both the FOMC statement and his press conference comments. Expect a lot more ducking and dodging as parries reporters looking for insight into how the Fed is internalizing recent Trump policies that have the potential to push inflation even higher.
That said, the inflation data is bad, but the war and tariffs don’t necessarily mean that another surge is coming. The tariffs are mostly a replacement for policies that were running out (expiring 10% tariffs were mostly replaced with 12% tariffs), and the price of oil continues to plummet on news that the Trump Administration is again scaling back attacks on Iran. Some consumer segments are showing increasing strain, raising the bar for businesses looking to pass along price increases, suggesting the inflationary impulse may not be as widespread as it appears.
It’s indisputable that recent events suggest the inflation outlook has worsened since the June FOMC, making a rate increase more likely in 2026. However, recent data has been surprisingly better than expected, and some of the economic impacts of the administration’s decision are unwinding. That will be enough to keep a hike in July off the table.
It’s 2026, so a lot can change in a few weeks, or days, or in the case of our last inflation piece, hours. Almost immediately after we posted it, the Trump administration responded to Iranian attacks on a freighter with a barrage of missiles, reigniting the conflict in the Middle East. And then, days later, the administration announced a new round of tariffs on Brazil, followed by a broader set of more permanent tariffs on major U.S. trading partners.
Those are all inflationary events that argue for a hawkish FOMC. One that needs to act sooner rather than later, before the upsurge in inflation worsens and the public starts to bake in a higher inflation rate over the next decade. With price growth running above target for over five years, we’re closer to that meltdown than it seems. And we share Governor Waller’s view that policymakers need to act before they have real trouble in longer-run inflation expectations.
I often hear people say that because inflation expectations are anchored, central bankers do not have to respond to above-target inflation. This view is wrong. When inflation is well above its target, and the labor market is near full employment and stable, any serious policy rule calls for raising the policy rate to bring down inflation. Sternly staring at inflation until it melts before our withering gaze is not an option.
That’s a proactive statement about taking decisive action. And recent events seem to indicate that a hike may be coming sooner rather than later. But what does the data suggest?
While the West Texas Intermediate (WTI) spot price of crude is down from last Thursday’s peak of $92/barrel, it’s still up over 20% from early July. That one statistic is a Rorschach Test for forecasters. Should we be concerned at the massive runup relative to early July? Or should we be taking a sigh of relief that prices have been falling quickly? Beauty is in the eye of the beholder, but from our vantage point, some pockets of consumer credit remain stressed — like credit card defaults — and the likelihood that the administration will continue to backtrack towards peace, leading to further rapid declines in crude prices, make it likely that businesses will again take the July oil price surge on the chin. So, a little more inflationary pressure from energy price passthrough, but not another surge in core measures (statistics that strip out food and energy).
And it’s not just the quick retreat in crude prices that is giving policymakers a reason to breathe a sigh of relief. The June CPI data was also much better than anticipated. For the first time since May of 2020, the monthly change in core CPI contracted ever so slightly (the report said unchanged, as they don’t round to the third decimal place). It’s one month of data, but the 0.017% decline was driven by more than just a slowdown in house prices and rents, hinting that we may see additional cooling in core CPI over the end of the summer.
There’s more to discuss on inflation; we’ll do another deep dive in a later post, but for now, there is enough positive information for the FOMC to hold off on raising rates in July. What happens next will depend as much on the occupant in the White House as underlying economic fundamentals.
Fed Chair Kevin Warsh has made his views abundantly clear: the FOMC needs to stop telegraphing its moves. And he’s wasted no time in shutting off the flow of information. His testimony during the Semiannual Monetary Policy Report to Congress was a masterclass in saying nothing about where the Fed is headed, or even how it is evaluating its work this year. Less is more when it comes to Fed direction is here to stay. And that is going to create some chaos in markets, and has been fueling speculation that perhaps the new Chair and others on the FOMC want to claw back some optionality and control by surprising everyone with a mid-summer rate hike. Here’s the problem with that: they still haven’t invented the flashy pen thing from Men in Black that wipes memories. There was literally no one on the pre-Warsh FOMC, which is mostly the same as the Warsh FOMC, except now Warsh is on it, that was deep into the “surprise the markets” camp. There is zero chance that enough of those members forgot the last decade-and-a-half of telegraphed monetary policy and are now riding fast and hard on the chaos train. It’s not a thing, especially for July.
We should also draw a distinction between not wanting to provide forward guidance, or a view on where policy is headed or how the Fed thinks about the economy, and actively trying to shock markets. The first is a communication strategy; the second is a policy objective. No one on the Committee is advocating for that; in fact, many are worried that removing forward guidance could inadvertently trigger an unwanted market shock.
Change is coming to the Summary of Economic Projections (SEP) and other forms of Fed communication. The institution will be much less transparent and will likely surprise markets down the road with a rate move. But that surprise isn’t coming in July 2026. There are reasons to hike on tomorrow, but clawing back optionality by trying to keep people on their toes isn’t one of them.
Dissents. The June FOMC minutes made it clear that some “participants”, a term which includes both voters and non-voters, are seriously considering rate increases. For the reasons stated above, it’s unlikely that there exists critical mass for such a move in July, but some hawks may start positioning for a September hike by dissenting. The two most likely candidates are Logan (Dallas Fed) and Hammack (Cleveland Fed). In the new era of unshackled dissenting, that won’t be surprising or enough to move markets. However, a third dissent, especially from Waller, would be a sign of serious commitment to raise rates at the next meeting.
Dissenter communiques on Friday. The June FOMC statement was…shorter than usual, and there was an interesting line at the start.
The Federal Open Market Committee approved the following statement for release by a 12-0 vote.
Notice what they approved: the statement. That stands in contrast to previous statements that included the phrase
Voting for the monetary policy actions were…
As others have noted, the new phrasing doesn’t give voters who support the rate decision but disagree with the statement a path to dissent. That might seem like a minor issue, but the uncertainty about inflation and conflict within the Committee means anyone who disagrees with something will want to explain why. In fact, this started before Warsh. Both Bowman and Waller issued statements following dissents in 2025. Warsh is going to frown on members who use any type of forward guidance, so don’t expect explicit thoughts on what’s to come, but we may get a few views on how certain members, particularly those who disagree with the statement or decision, think about the economic trade-offs related to hiking. That’s a forward-guidance backdoor that may become a popular way to continue providing the public with forward-looking information.
Anything of interest in the description of economic conditions in the statement. The June economic statement wasn’t wildly different from what came before, especially considering the other changes to the release. That section has become even more significant now that forward guidance has been completely stripped out of all official FOMC communiques that aren’t individual speeches. That section will be combed with an extra careful eye by Fed watchers and the market for clues about how the FOMC is thinking about inflation and the strength of the labor market.
Tidbits about the task forces. Warsh has selected his task force champions, and they are already at work reassessing much of what the FOMC left untouched during last year’s Monetary Policy review. As Nick Timiraos of the Wall Street Journal reported this morning, that has ruffled some key feathers and gifted Warsh the “good family fight” he’s been gunning for. More clues to Waller’s frustration with the current state of affairs can be found in his recent speech (linked above), where he provided forward guidance on what it would take for him to consider raising rates. Removing that kind of communication is one of Warsh’s biggest goals, and something he has been arguing in favor of over a decade. He is unlikely to start pushing back on individual members, or even reveal anything about the direction of the task forces before they provide official recommendations to the Committee, which may trickle in ahead of any year-end report. But Warsh has really been peacocking since becoming Chair, which could lead to a slip up if pressed about the direction of the task forces at the post-meeting presser.
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