The Economy
MEMORANDUM
TO: Kevin · FROM: The Economy · RE: Your First Week
Washington D.C. / New York · Sunday, 1 June 2026
FFR: 3.50–3.75% · Core PCE (Apr): 3.3% YoY · Headline PCE (Apr): 3.8% YoY · 2Y Treasury: >4.0% · 10Y Treasury: 4.44% · CME Fed cut probability (June): ~1% · BofA first cut call: H2 2027
Here is what happened last week, plainly stated: the Federal Reserve's preferred inflation gauge confirmed that prices in April rose 3.8% on a headline basis, up from 3.5% in March. Core PCE — which strips out food and energy, the things everyone actually buys — came in at 3.3% year-over-year. The central bank's target is 2%. It has been above that target for five years. Kevin Warsh was sworn in as the 17th Chair of the Federal Reserve approximately one week ago. The first FOMC meeting under his gavel is in mid-June.
The CME FedWatch tool currently shows a 98.8% probability of rates staying exactly where they are — at 3.50% to 3.75% — when that meeting concludes.
So: new chair, same rates, worse inflation. Quite an inheritance.
The Problem With Being Dovish When the Data Isn't
Warsh came in with a reputation. He publicly backed lower borrowing costs. Trump wanted rates at 1% or below — and made no secret of it. The market dutifully priced a cut at the June meeting for about three weeks in January before the data started arriving and quietly, methodically, dismantled that expectation piece by piece.
The Iran war changed everything. Energy prices spiked. Headline PCE, which had been gently drifting toward something resembling the Fed's target, reversed. The 2-year Treasury — which is essentially the bond market's continuous real-time prediction of Fed policy over the next couple of years — briefly cleared 4% this week. That is not the yield of a market expecting rate cuts. That is the yield of a market quietly beginning to price a hike.
Not next month. Not this year, probably. But the 2-year doesn't lie about the direction of travel. And right now it is pointing up.
"Inflation is a choice, and the Fed must take responsibility for it," Warsh told the Senate Banking Committee on April 21.
Fine. Admirable, even. The Fed made choices. Now a new chair inherits the consequences of old ones. The post-pandemic rate hike cycle came late and went hard. It brought core PCE from above 5.5% in 2022 down to a whisker above 2.9% — and then the Iran conflict ignited energy prices and everything re-accelerated. Warsh didn't cause this. But Warsh will own it. That's how institutional history works.
The President Would Like a Word
Here is the secondary problem, sitting just beneath the inflation data like a structural fault nobody wants to drill into: Donald Trump has stated, repeatedly and without much ambiguity, that he wants rates at 1%. Warsh has said he makes no promises based on political pressure. Powell, in a development that has its own novelty, is apparently staying on the Fed board after a Justice Department probe persuaded him to remain rather than exit. So the new chair will conduct policy meetings with his predecessor in the room.
This is not a normal institutional arrangement.
The Fed's dual mandate — price stability and maximum employment — has rarely been in such direct, vocal tension with White House preferences. That tension is not new in American monetary history; it goes back at least to Nixon leaning on Arthur Burns. What is new is the candor. The current political environment doesn't dress this up. Trump says he wants 1%. The data says rates should probably stay put. Warsh sits in the middle and will be asked to explain the gap publicly, every six weeks, at a press conference that will be watched for any hint of political accommodation.
BofA Global Research, for its part, has pushed its first rate cut call all the way to the second half of 2027. Most traders think the earliest a cut arrives is July or September of next year. The equity market, surging to fresh all-time highs on a nine-week winning streak, seems to have decided this doesn't matter.
What the Stock Market Has Decided to Believe
The S&P 500 closed Friday at 7,580. The Dow at 51,032. Record highs. The argument the equity market is making — implicitly, in the only language it speaks — is that AI earnings are so strong, and the corporate profit cycle so intact, that the rate environment is secondary noise. S&P 500 companies reported 28% aggregate earnings growth last quarter. The IT sector posted net margins of 29.1% in Q1, up from 25.4% a year earlier. Dell guided to $165–169 billion in revenue. The infrastructure buildout is real, and it is landing in actual income statements.
The bulls are not delusional. They have data.
But here is what coexists with that data: core PCE at 3.3%, trending up. A Fed chair walking into his first meeting with one hand tied by the White House and another by a board he didn't appoint. A 2-year Treasury drifting toward levels that historically precede hikes, not cuts. Oil prices down this week on Iran ceasefire hopes, which has provided temporary relief — but WTI at $88 is still not the $70-handle that would allow the Fed to credibly declare energy-driven inflation transitory and move on.
The bond market and the equity market are telling different stories about the same economy. They cannot both be right. They have been wrong simultaneously before, and the resolution is usually abrupt and unpleasant for whoever capitulated last.
One More Thing, Kevin
There is a detail in how Warsh thinks about inflation worth filing away. He doesn't love core PCE — the Fed's traditional preferred gauge. He prefers trimmed mean measures, like the Dallas Fed Trimmed Mean, which strips out the most extreme price moves in both directions before calculating the index. In April, his preferred gauge held steady on a year-over-year basis. That's the number he'll likely anchor to in June testimony. It's also not the number that will appear in the headline when the BEA releases the May figures in late June.
Managing inflation optics in an environment where the president wants 1% rates and the data prints 3.8% is not a communications challenge. It is a stress test. Warsh has the intellectual framework. He called the post-pandemic surge the "biggest policy error in 40 or 50 years." He is not naive about what high inflation does to real wages, to consumer confidence, to the political coalition that installed him.
But calling something a policy error is easy. Fixing it with rates already above neutral, an equity market at all-time highs, a White House that considers rate cuts a birthright, and a predecessor sitting three seats down the table — that is the job.
The memo ends here.
The Economy
All data as of close 30 May / BEA release 29 May 2026. This is commentary, not investment advice. Nothing herein constitutes a solicitation.