The Sheriff Arrived Just As The Outlaws Left Town
The Sheriff Arrived Just As The Outlaws Left Town
The May PCE report came in Thursday and it was, by almost every headline metric, the number that Warsh hawks have been pointing at for months. Headline personal consumption expenditures running at 4.1% year-over-year — the hottest since April 2023. Core PCE at 3.4%, its highest since October of the same year. Services inflation accelerating to 0.5% month-on-month, faster than the prior two months. A spending number that came in above forecast. The whole package, if you were trying to build a court case for monetary tightening, reads like your star witness showed up clean and sober.
There's just one problem. The energy war that generated most of this reading ended. Or at least, its most acute phase did.
Brent crude hit an intraday wartime peak of around $114 a barrel at the height of the Hormuz crisis. By Thursday it was trading near $73.40. That's a 35%-plus collapse in the oil price, playing out over weeks, not reflected in May's PCE data at all. Meanwhile, the Dallas Fed's trimmed mean PCE — strip out the volatile tails in either direction and measure what underlying consumer inflation is actually doing — ran at 2.4% over the twelve months through May. Two point four. As in, about two years of 0.2% monthly prints separating Warsh from his stated goal. The headline number is doing its political work. The underlying number is waving quietly from the corner.
This is a genuinely uncomfortable position to be in if your name is Kevin Warsh and you just presided over the most ostentatiously hawkish FOMC debut in recent memory.
The statement: 130 words, down from 341 in April. Forward guidance: deleted. Easing bias: removed. The dot plot: nine of eighteen participants now projecting at least one rate hike before year-end, six of those seeing two. Warsh himself: no dot submitted, five task forces formed, a clear signal that he intends to strip the Fed's communications apparatus down to its studs and rebuild it. "I am pleased to report that members of the FOMC are unambiguous and unanimous — this committee will deliver price stability," he said. Strong stuff. The kind of language that moves curves. Treasury yields climbed sharply following the statement. Fed futures repriced toward 30 basis points of hikes by year-end, up from 20 before the meeting.
The problem with establishing yourself as the inflation hawk is that you then become hostage to the inflation data. And the inflation data is about to move in a direction that makes hawkishness look either premature, or opportunistic, or both.
The Strait of Hormuz is open again. Oil is at $73. WTI was at $67 when the war started in late February, peaked near $119 in March, and has spent the past several weeks giving all of that back and then some. The energy shock that drove CPI to 4.2% in May and PCE to 4.1% is — if the peace holds, and it's a meaningful if — now in active retreat. June's readings should show a mechanical disinflationary impulse from energy that is likely to be dramatic. Core, which sits at 3.4% with services contributing the stickier part of the pressure, is more honest about the underlying challenge. But 3.4% core PCE in a cooling economy with a trimmed mean near target is a far cry from the sustained price instability Warsh has been thundering about.
There are two possible interpretations of what happens from here, and they lead to very different places.
Interpretation one: Warsh is playing a long game. He knows the May number is the peak. He also knows that his credibility as an inflation fighter will be built or destroyed in the next six to twelve months, and that credibility is more valuable than any single data point. By establishing the institutional tone early — concise statements, no forward guidance, no dot, no hostage-taking by the calendar — he's positioning the Fed to respond to data rather than manage expectations. If inflation falls on its own, he gets credit for the threat of tightening. If it doesn't, he has the institutional machinery in place to actually do something about it. Clean.
Interpretation two: the dot plot tipped the hand. Nine of eighteen participants projected a hike before year-end. Six see two. That's a majority of the committee, on the record, in a semi-public format that Warsh didn't even participate in himself, suggesting tightening. If the next two PCE prints come in soft — and they may, energy math is brutal in reverse — those dots will look like they were calibrated to a war premium that has already resolved. The Fed will not be the first institution to tighten at exactly the wrong moment; it won't even be the worst in its own recent history. But it will be Warsh's first legacy entry, and it won't be a flattering one.
The trimmed mean at 2.4% is doing a lot of heavy lifting in interpretation two. The Dallas Fed's measure is designed precisely to see through energy spikes and their reversals. It has been sitting stubbornly near or slightly above 2% for most of the past year. If you believe the trimmed mean over headline PCE, the Fed is already close to mission accomplished and the question is whether it knows it.
None of this is meant to suggest Warsh is wrong. The five years of above-target inflation he referenced in his press conference are real. The institutional credibility the Fed squandered during 2021 and 2022 by calling inflation transitory is real. Warsh understands, probably better than his predecessor, that the cost of being wrong about price stability runs asymmetrically. Letting inflation expectations get unmoored again would be catastrophic. So you build the wall, even if the tide is already going out.
But the cynical read — the one markets are quietly marking — is that May's PCE data arrived like a gift-wrapped justification for everything Warsh wanted to do anyway. He wanted to tighten communications. He wanted to restructure the dot plot. He wanted to shed the easing bias that the previous regime attached to itself like a second mortgage. He wanted a clean mandate and a credible threat. Now he has all of that, underwritten by the hottest inflation reading in three years, just as the source of that reading — Iranian missiles and a choke point in the Persian Gulf — disappears from the data.
The sheriff rode into town on his fastest horse, guns drawn, to find the street empty. The outlaws settled their tab and left while he was still on the road. What he does next — holsters the guns gracefully, or starts arresting people anyway — is the whole story of the second half of 2026.