Fed Policy Shift, Sticky Inflation, and Bond-Market Stress
Key Questions
What occurred during the FOMC meeting on June 17?
The FOMC held rates steady in Kevin Warsh's first meeting with a 9-9 split. Warsh's approach of reduced forward guidance contributed to market uncertainty.
Why did markets sell off sharply on June 18?
The selloff followed the FOMC decision and Warsh's silence on policy outlook. This reduced forward guidance heightened investor caution.
What was the May PCE inflation reading and its impact?
May PCE came in at 4.1% YoY with core at its highest since October 2023, but the data was in-line with expectations. This relieved markets somewhat despite the high reading.
What is the current probability of a rate hike?
Rate hike probability remains above 70% following the FOMC meeting and inflation data. Strong data has firmed expectations for potential tightening.
How did global markets react to the Fed and inflation news?
S&P 500 futures fell and Asia-Pacific markets including South Korea's Kospi sank amid the tech sell-off. Nasdaq futures later recovered on in-line inflation and earnings.
The Wednesday FOMC meeting is the near-term market focal point. August headline CPI rose 3.4% year over year and core CPI rose 0.3% month over month; markets reportedly price about an 86% probability of a hike, but energy-led inflation and narrower underlying demand leave the decision and guidance contested. Warsh's communication and any response to political pressure could drive yields and rate-sensitive equities.