Sticky inflation/May PCE 4.1% revives hike bets, delays cuts; core PCE nuance added; Warsh explores alternative inflation metrics; QT resumption
Key Questions
What was the May PCE inflation reading and its core component?
May PCE showed headline inflation at 4.1% and core at 3.4%. This sticky reading initially revived hike bets before the June payrolls miss altered the outlook.
How is Warsh addressing alternative inflation metrics?
Warsh is forming task forces to explore alternative inflation metrics, forward guidance, and balance sheet issues. The trimmed mean PCE at 2.4% is being used to challenge the hawkish consensus around headline figures.
What signals has Warsh given on quantitative tightening?
Warsh resumed QT via a subtle language change in the June Implementation Note. This adds a tightening dimension, though analysis suggests meaningful QT may remain limited by political and market constraints.
What are current market odds for a July hike versus September cuts?
July hike odds are around 25% per Waller, while September cut odds have risen to 47-80%. Citi now calls for cuts starting in October after declaring the hike rationale has disappeared.
How have mortgage rates responded to sticky inflation?
Mortgage rates jumped to 6.36% amid sticky services inflation. This reinforces the Fed's hold stance despite some dovish repricing after weak payrolls.
What changes are coming to PCE methodology?
The BEA announced a PCE methodology overhaul effective September 30 that may revise core PCE down by 0.1-0.2pp. June CPI is expected to fall on gasoline prices, supporting an extended pause.
What is the base case from institutional views like Neuberger?
Neuberger's CIO sees an extended hold as the base case with 40% probability and no cuts through 2027. Disinflation narratives around energy and shelter support this view.
How has the bond market influenced Fed expectations?
The six-month Treasury yield at 4% is signaling the Fed to proceed with rate hikes. QNB sees further tightening, providing a hawkish counterpoint to dovish market pricing.
May PCE at 4.1% headline, 3.4% core. June payrolls miss (57k) sharply reduces near-term hike pressure; July hike odds ~25% (per Waller), September cut odds rise to ~47-80%. Trimmed mean PCE at 2.4% vs headline 4.1% challenges hawkish consensus. Warsh forming five task forces on alternative inflation metrics, forward guidance, and balance sheet. Warsh resumed QT via subtle language change, adding tightening dimension. BofA three-hike forecast and Kashkari hike call remain but are now less likely. Market pricing: July hike odds ~25%, September cut odds ~80% (some measures). Daly ties spring inflation spike to tariffs and oil. Warsh's inflation focus remains, but dual mandate commitment questioned. UBS argues Warsh's price stability focus doesn't imply hikes. Goldman Sachs sees cuts more likely than hikes but not imminent. Dot plot shift: median year-end rate from 3.4% to 3.8%, nine officials see a hike. Morgan Stanley warns rate hikes could return if unemployment falls below 4% or core inflation stays elevated, providing a counterpoint to the recent dovish tilt. A new analysis argues meaningful QT is unlikely due to political and market constraints, reinforcing the glacial unwind view. Upcoming FOMC minutes (July 8) and ISM services PMI are key catalysts. Blitz argues the weak payrolls give Warsh cover to avoid rate changes through September. New articles confirm Warsh's first FOMC hawkish tone and balance sheet signal (glacial unwind, rates priority). Trump attacks Cook but gives Warsh breathing room; hold odds at 82% after jobs miss. Trump explicitly called Warsh 'dovish' and pressured for lower rates, reinforcing political pressure narrative. A preview piece on FOMC minutes and ISM Services highlights internal division risk. QNB sees further tightening, and the bond market (six-month Treasury yield at 4%) is telling the Fed to get on with rate hikes, providing a strong counterpoint to the dovish narrative. Mortgage rates jumped to 6.36% on sticky services inflation, confirming the hold stance. Warsh's latest comments vow to disappoint those expecting cuts, reinforcing inflation focus. QNB analysis adds hawkish counterpoint. Citi Research now explicitly declares rate hike rationale 'disappeared' and calls for cuts starting October, providing a strong dovish counterpoint. This week's FOMC minutes (July 8) are the key catalyst for decoding the internal debate. A weekly roundup (July 6) synthesizes these themes. MUFG's Goncalves notes that Warsh's concise style increases importance of minutes, with market discomfort over reduced transparency. A new preview of Warsh's Sintra speech (ING) reinforces hawkish posture with core PCE at 3.4% and bumper payrolls, market pricing 22bps tightening by September. Another article from Singapore shows how analysts are adapting to Warsh's data-dependent communication shift, adding an international perspective. Neuberger CIO piece adds a nuanced institutional view: base case extended hold (40% probability, no cuts through 2027), with disinflation narrative supporting the hold camp. Waller's speech on transmission and forward guidance adds depth to internal debate, criticizing rigid forward guidance in 2020-2021, aligning with Warsh's shift. New today: Waller's hawkish comments (inflation risk, July hike odds ~25%) and his nuanced defense of forward guidance, calling it 'more art than science' and acknowledging past failures but arguing for sparing use. Another article confirms Waller publicly backs Warsh's rethink. BEA PCE methodology overhaul announced (effective Sept 30, may revise core PCE down 0.1-0.2pp). June CPI expected to fall on gasoline, supporting extended pause. A contrarian analysis (Joe Santos) argues the Fed's current path is insufficient to anchor inflation expectations, adding a credibility risk.