June 2026
When Chairman Warsh took over as head of the Federal Reserve, the consensus opinion was that the economy had begun to reaccelerate and that additional rate cuts would not be necessary. Warsh, while noncommittal, seemed to confirm that view at the conclusion of his first Open Market Committee Meeting. He followed up on those comments when he participated in the ECB Central Banking forum saying inflation was too high. This week he again reiterated that view in Congressional testimony saying the Fed would not tolerate persistently high inflation.
That begs the question, if he is concerned about the pace of inflation then why has he not yet raised the Fed Funds rate. It’s been the standard practice of the last few Fed Chairs to raise or lower the interest rate at the conclusion of the regularly scheduled committee meeting. But Warsh has said that he wants to change how the Fed operates. He has not explicitly said that intra-meeting change in monetary policy would be the new procedure, but we are eager to learn if that’s in the cards and would, in fact, welcome it. Under the old regime, if economic data looked too strong or too weak, the Fed would act on the day of the release and not delay the change until their meeting.
With that said the recent economic data for June may be enough to keep the Fed on hold at their meeting later this month. The June employment report was mildly disappointing. There were 57,000 new jobs created in the month, about half of the 113,000 that was expected and the three-month average has fallen to 111,000, down from 164,000 last month. That’s still better than the 0 to 50,000 monthly job creation run rate that former Chairman Powell predicted late last year.
The unemployment rate unexpectedly fell to 4.2%, but that’s not entirely good news either. Within the report the BLS estimated that household employment fell 507,000 while the labor force fell 720,000. This is clearly the baby boom effect of workers aging out of the workforce.
Then on the morning of Chairman Warsh’s Congressional testimony the Bureau of Labor Statistics reported that headline CPI fell -0.4% from the May reading. The expectation was that it would fall -0.1% from the 0.5% reading the prior month. The headline year-over-year pace of inflation also surprised to the downside registering 2.6% in June down from the 2.9% the previous month.
It’s never a safe bet to interpret the state of the economy based upon a single economic indicator and we think in the instance of the employment report and the CPI is a case in point. We agree with that conclusion. The employment picture appears to have weakened but we’re not ready to conclude that we’re on the verge of an employment-led recession.
Similarly, the inflation data is “noisy” due to the war with Iran and the associated costs and not because the trend in inflation has reversed. Nevertheless, we think that those two outcomes will keep the Fed from raising the overnight rate at the July 29th meeting.
