Fed Rate Cut Hopes Dwindle as New Data Changes Outlook
For much of the past year, the market debate has centered on when the Fed would resume cutting interest rates. The June meeting, held this week, was circled as a distinct possibility for a pivot in monetary policy with Kevin Warsh as the new chairman.
What we saw instead was a case study for why it rarely makes sense to try and predict Fed policy.
The first factor has been volatility in the inflation data. The latest Consumer Price Index (CPI) report showed headline inflation rising to 4.2% year-over-year in May, up from 3.8% in April. A CPI reading with a 4% handle makes it very difficult for the Fed to justify easing policy, even if the underlying details are more nuanced than the headline suggests (more on that below). Core CPI rose 2.9% year-over-year in May, which showed that even without the energy wild card, inflation remains well above the Fed’s 2% target.
With this data released a week prior to the Warsh’s first meeting as Fed chair, the market had essentially ruled out a rate cut. What came as more of a surprise, however, was the general sense of a shifting posture amongst Fed officials, with updated projections signaling a growing appetite for tighter policy. Nine officials now see at least one rate increase by year-end, which is a substantial shift from earlier in the year.
But as I mention earlier in this piece, investors should avoid concluding that higher rates are a given. Fed projections change, economic data change, and market expectations change alongside them. So, even though the market sold off on the day of the Fed meeting, I really don’t see much insight to glean from it looking ahead. It’s a short-term response to a long-term unknown.
The CPI report itself shows why the picture remains complicated. Energy prices did much of the lifting in the headline number, but energy-driven inflation is not the same as broad-based inflation. For inflation to become a more serious market problem, higher energy costs would need to spread into wages, services, goods prices, inflation expectations, and corporate pricing behavior. But we haven’t seen much of that at all.
Core CPI rose only slightly on a year-over-year basis, from 2.8% to 2.9%, and on a month-to-month basis, core inflation actually cooled from 0.4% to 0.2%. Core goods inflation did not show a broad acceleration, food price increases slowed, and some services categories looked less heated than the headline number implied.
To be sure, inflation is still too high, and the Fed has little reason to make a case for monetary easing. But it also does not look like the return of an inflationary regime, like the 2021–2022 inflation environment. That inflation surge followed a sharp expansion in money supply and fiscal support, which helped fuel demand and gave consumers and businesses more capacity to absorb higher prices. Today, money supply growth is far more subdued, and consumers appear more selective and price-sensitive.
From here, investors should watch whether inflation remains concentrated or starts to spread. Core services, wage growth, inflation expectations, and corporate margins will be especially important. If energy-driven inflation begins showing up across a wider range of goods and services, the Fed may have a more serious problem. If it does not, worries that the Fed may tighten this year are probably overblown.
Bottom Line for Investors
Higher inflation coupled with the Fed’s latest projections shows that some officials are now more open to hikes than cuts. But investors should be careful not to turn that into a firm forecast.
The same lesson applies now that applied when markets were pricing-in cuts: Fed policy is difficult to predict because it depends on data that can change quickly. The more important takeaway, in my view, is that while inflation remains sticky, it is not clearly resurgent. Energy is lifting the headline number, while core inflation has not shown the kind of broad acceleration that would suggest a return to the 2021–2022 inflation regime.
Rate cuts may be off the table for now, but that does not automatically mean the Fed is headed into another aggressive tightening cycle. As long as inflation pressures remain contained and earnings hold up, markets can work through a higher-for-longer rate environment. The key is to avoid building an investment strategy around the next Fed meeting; it does not matter as much as many investors tend to think it does.
Social Security’s Latest “Deadline” is Serious, But Not as Worrisome as It Seems
The latest Social Security trustees’ report put a familiar issue back in the headlines, which tends to create an annual stir of concern and worry. This year’s report projected that the main retirement trust fund will be depleted in the fourth quarter of 2032, one year earlier than previously expected. If nothing changes, incoming payroll-tax revenue would cover about 78% of scheduled benefits at that point, which is clearly a substantial shortfall. These figures seem quite concerning, but it’s important to think of them in the context of what Social Security is and is not. Importantly, Social Security is not a private pension fund sitting on a pool of market assets that suddenly vanishes on a specific date. It is, and always has been, largely a pay-as-you-go system. Payroll taxes collected today fund benefits paid today, with trust-fund reserves filling the gap when annual revenue falls short. Though the headlines often suggest otherwise, the shortfall is not new. Social Security’s cost has exceeded its non- interest income since 2010, and total cost has exceeded total income since 2021. Last year alone, combined trust-fund reserves fell by $160 billion to $2.56 trillion, even as the program paid $1.60 trillion in benefits to 70 million people. If Congress were to do absolutely nothing, benefit reductions would eventually be required under current law. But the political odds of lawmakers allowing a blunt, across-the-board cut to current retirees are very low, unless none of those lawmakers want to get re-elected. History suggests some mix of tax increases, eligibility changes, or future benefit- formula adjustments is far more likely.
What We Learned from Kevin Warsh’s First Meeting as Fed Chair
Kevin Warsh took the helm as Fed Chairman and oversaw his first FOMC meeting this week. The result was no change to the benchmark fed funds rate, which was broadly expected and not overly newsworthy. May CPI showed inflation running at 4.2% year over year and core inflation at 2.9%, with energy accounting for more than 60% of the monthly increase in consumer prices Holding rates steady was essentially the only Fed move available. What we did learn from the meeting, however, was how Fed officials were reading the economy and also what kind of chair Warsh may be. Updated projections showed nine Fed officials now see at least one rate hike this year, a sharp shift from earlier expectations. This is key because Warsh entered the job with some expectation that he might tilt more dovish, especially given President Trump’s preference for lower rates. Instead, his first meeting suggested a chair focused on establishing inflation-fighting credibility and signaling independence early. Warsh also signaled to the market that he is poised to have stylistic differences from his predecessors. The Fed’s statement was shorter and more direct, and Warsh introduced several task forces that could reshape how the central bank communicates and operates. For investors, the takeaway is that Warsh’s debut did not hint at a quick pivot to easier policy. If anything, it suggested a more disciplined, institution-minded chair than some may have assumed. Fears of the Fed losing independence appear to have been overblown, as we suspected.
Oil’s Drop Is Encouraging, but the Supply Picture Still Isn’t Fully Normal
Oil prices fell sharply after the U.S. – Iran Memorandum of Understanding contained language ensuring the reopening of the Strait of Hormuz, easing fears of a prolonged supply shock. As we write, Brent crude dropped to roughly $77.69 a barrel and WTI to $74.90, leaving both benchmarks down more than 13% for the week and back near their lowest levels since the Iran war began. That is clearly encouraging, and gas prices at the pump should follow in time. But the market’s price reaction may be moving faster than the physical oil market itself. The Strait of Hormuz normally carries about one-fifth of global oil shipments, and recent estimates suggest dozens of supertankers carrying roughly 87 million barrels remain stranded inside the Gulf. Even with a deal in place, tankers still need to be repositioned, shipping lanes secured, insurance restored, and damaged infrastructure repaired. In our view, for now this looks more like a release valve than a floodgate, with Gulf exports expected to recover to prewar levels by the end of July, with production normalizing closer to October. We think the worst-case supply shock now looks less likely, which should help relieve inflation pressure. But tighter inventories and a gradual recovery in flows mean energy markets may remain firmer than the headline drop in crude prices alone would suggest.
REFERENCED ARTICLES:
- Wall Street Journal. June 9, 2026. https://www.wsj.com/politics/policy/social-security-trust-insolvency-2032- d26bf25e?mod=article_inline
- Wall Street Journal. June 13, 2026. https://www.wsj.com/economy/central-banking/five-takeaways-from-kevin-warshs first-meeting-as-fed-chairman-89174ad8?mod=economy_lead_pos3
- Wall Street Journal. June 18, 2026. https://www.wsj.com/business/energy-oil/how-quickly-can-the-strait-of-hormuz-get back-up-and-running-a5380c70?mod=finance_feat5_commodities-futures_pos1
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