The Iran war is edging ever-closer to a resolution. Oil and gas prices at the pump are back down. Chip stocks are in a news lull between earnings seasons. SpaceX won’t join a major index until July.
This has paved the way for the Federal Reserve to once again claim center stage, and the timing couldn’t be better. Last week’s FOMC meeting gave investors a fresh peek at the central bank’s internal dialogue. Newly appointed chair Kevin Warsh hosted his first presser.
The Fed ultimately succeeded in wresting back the market narrative. For the foreseeable future, with every shred of new data, investors are going to be laser-focused on rate hikes — especially the timing of the first one.
Unfortunately, for the moment, the Fed’s messaging is about as clear as mud. Exactly half of the 18 voting FOMC officials supported a rate hike. For his part, Warsh has decided to do away with forward guidance.
Investors chose to interpret the meeting as hawkish. They keyed in on Warsh’s focus on inflation, as well as six of nine rate-hike backers supporting multiple raises in 2026. Stocks fell and bond yields spiked. The hawks in the audience have heard this story before. When rate hikes are in vogue, bond yields tend to rise, and equity investors don’t like that.
The fact that the debate exists at all is a stark departure from March, when no policymakers had a rate hike penciled in and the committee was signaling a cut.
Beyond that, the expected timetable for a rate hike has accelerated. Heading into the Fed meeting, an increase was seen most likely in December. According to FedWatch, here’s where things stand now after some major shifting (as of Sunday evening):
July meeting: 39% chance of hikeSeptember meeting: 74% chance of hikeOctober meeting: 78% chance of hikeDecember meeting: 90% chance of hike
The main sticking point — as it usually is with the Fed — is inflation. While recent data hasn’t come in hotter than forecasts in recent months, consumer prices are still rising at the fastest pace in three years.
We’ll get the next major input this Thursday: the May personal consumption expenditure (PCE) index, which is generally viewed as the Fed’s preferred inflation gauge. June CPI isn’t due until July 14, so we have a while to marinate with the current guidance.
With the timing still uncertain, we can at least examine the arguments for and against rate hikes:
Arguments in favor
Inflation isn’t behaving. The Fed’s mandate is technically 2%. We’re at 4.2%.The labor market is too resilient to need more monetary support.Tariff risks are still working their way through the system.
Arguments against
Inflation is elevated, but not accelerating.Economic growth is already slowing (i.e. consumer spending, manufacturing activity).Tariff inflation is largely a supply shock, and doesn’t necessarily reflect excessive demand.
