Last week’s letter left an open question hanging in the air: Would the labor market’s slow warming ever reach the people standing inside it? This week supplied a partial answer, plus a new face at the podium, as Federal Reserve Chair Kevin Warsh is scheduled to deliver his first congressional testimony while the data beneath him tells an increasingly split story. Assets are earning their keep and debts are behaving, while everyone else waits for the thaw to arrive.

Executive Summary

• Federal Reserve Chair Kevin Warsh testifies before Congress this week for the first time since his confirmation. Given his preference to eschew forward guidance, it is unlikely that his appearance will change forecasters’ outlooks for monetary policy.
• The Institute for Supply Management (ISM) nonmanufacturing index slipped 0.5 point to 54.0 in June, while its prices index fell 3.6 points to 67.7, the lowest reading since the start of the US/Israel-Iran War.
• The May trade deficit widened to $77.6 billion from $54.6 billion, pointing to a net trade drag north of 2 percentage points on second quarter gross domestic product (GDP), well above the 1.3 percentage point drag built into the prior baseline.
• Consumer credit slipped $0.2 billion in May, its first decline since June 2025, as a $5.3 billion drop in revolving credit outweighed a $5.1 billion rise in nonrevolving credit.
• Existing home sales fell 2.4% in June to a seasonally adjusted annual rate (SAAR) of 4.09 million, yet sales of homes priced at $1 million or more rose 18% year over year while the lowest price tiers stayed flat or fell.
• Initial jobless claims eased 2,000 to 215,000 in the week ended July 4, and Oxford Economics raised its 2026 GDP growth forecast by 0.2 percentage point to 2.3% while trimming its headline inflation forecast by 0.4 percentage point to 3.2%.

The Fed: Warsh Steps to the Podium

On Tuesday and Wednesday of this week, Federal Reserve Chair Kevin Warsh appears before Congress for the first time since his confirmation, delivering the semiannual testimony required by law. We doubt his appearance will alter the outlook for monetary policy. The FOMC carries a hawkish bias because of elevated inflation, yet it is in no rush to raise rates. Unless there is a meaningful change in the data or economic situation, the expectation remains that the committee holds steady while inflation gradually declines, with the next policy change arriving as a rate cut most likely in 2027.

Twice each year, the Fed must submit a policy report to Congress “containing a discussion of the conduct of monetary policy and economic developments and prospects for the future, taking into account past and prospective developments in employment, unemployment, production, investment, real income, productivity, international trade and payments, and prices.”

It was interesting to see whether the report was going to shrink the way the FOMC policy statement did, or the way the FOMC minutes did, which ran roughly 20% shorter than those from former Chair Jerome Powell’s last meetings. Instead, Warsh set a record for the length of a first monetary policy report from a Fed chair, at least by page count, even though his word count came in lower. It is the equivalent of a playwright trimming every line of dialogue while doubling the stage directions: less said, more pages spent describing how it should be said. Not surprisingly, the report, released the prior Friday, details five task forces Warsh has created to examine the Fed’s approach to conducting monetary policy, a subject he will likely revisit in his prepared testimony as well.

Geopolitics added a wrinkle without forcing a rewrite. The resumption of military strikes between the United States and Iran lends upside risk to the forecast for oil prices and inflation, a risk that would grow if hostilities persisted.

The broader July forecast update raised 2026 GDP growth by 0.2 percentage point to 2.3% and cut headline inflation by 0.4 percentage point to 3.2%, reflecting a milder hit to real incomes from oil than previously assumed. The offset sits in the core: core inflation now looks likely to stay above the Fed’s 2% target six months longer than earlier expected, as artificial intelligence (AI) related demand keeps electronics prices elevated. The June FOMC minutes reinforced the same tension, confirming inflation as the dominant concern with a few officials saying they could have backed a rate hike in June, though the minutes did not change the baseline of an extended pause, and a range of Taylor type policy rules still points toward a cut eventually, even as the hawkish shift leaves little tolerance for any upside surprise in inflation.

• Key Takeaway: Warsh’s first turn before Congress is unlikely to move markets or the forecast on its own, and the more informative signal keeps coming from beneath him: a committee content to wait, a rate cut path anchored to a date further out in the future and a round of Iran-related risk that muddies the water but is not yet changing forecasts.

The Labor Market: A Quiet Summer

Initial jobless claims eased 2,000 to 215,000 in the week ended July 4, a touch lower than expected but consistent with the low, stable layoff rate that has defined recent months. A revision took the prior week up 2,000 to 217,000, and the four-week moving average fell 3,750 to 218,750, moving further away from the elevated June readings helping reinforce the argument that the earlier rise in claims reflected seasonal noise rather than any genuine deterioration in labor market conditions.

On an unadjusted basis, claims rose 9,967, which was modestly less than the 11,478 increase seasonal factors had anticipated. Summer auto plant shutdowns typically show up in the unadjusted data at this point in the calendar, yet states with high auto employment have trended well below prior years so far in July.

In the week ended June 27, continued claims rose 8,000 to 1.814 million, after a downward revision of 8,000 to the prior week. The four-week average has tilted slightly higher since May, but with initial claims falling and payroll growth improving, continued claims are more likely to move lower in the weeks ahead.

The manufacturing side of the labor market offered a small corroborating signal. The ISM nonmanufacturing employment index expanded for the first time in four months, helped in part by hiring tied to the World Cup, though the move looks like stabilization rather than a genuine reacceleration, which bolsters the argument for the Fed to stay on an extended pause as it focuses on the inflation side of its dual mandate. Oxford Economics’ own labor market tracker tells a similar story, consistent with a job market roughly in balance but showing more signs of softness than overheating, with the hiring rate still the weakest metric even as it has stabilized off its recent low. Picture a swimming pool with the drain and the tap both open at close to the same rate: the water level barely moves, even though plenty is happening just beneath the surface.

• Key Takeaway: The labor market is settling into a quiet summer rhythm, neither heating up nor cooling down in any convincing way, an equilibrium built as much on a shrinking pool of available workers as on employer demand, and that quiet is precisely the condition under which a patient Federal Reserve prefers to sit still.

Services and Prices: Cooling on a Second Front

The ISM nonmanufacturing index ticked down 0.5 point to 54.0 in June, though every one of its four components still registered expansion. Business activity and new orders slipped slightly but stayed above their twelve-month averages, evidence that the services side of the economy remains resilient. The supplier deliveries index ticked lower too, still pointing to some lingering supply chain stress that the onset of peak shipping season could aggravate in coming months.

The more interesting number sat in prices. The prices paid index fell 3.6 points to 67.7, its lowest reading since the US/Israel-Iran War began, as some respondents reported the benefit of lower energy costs. The reading lines up with the view that inflation likely peaked in May, aided by the retreat in oil prices tied to the de-escalation in the Middle East, although headline inflation should stay well above the Federal Reserve’s 2% target for the rest of the year.

The relief is unlikely to spread evenly. Brent crude may very well average in the low $70 per barrel range in the second half of the year assuming no re-escalation of the conflict in Iran. At the same time, respondents in food services and agriculture both reported higher input costs in June and expect the impact to peak in the third quarter, consistent with the forecast for food inflation to accelerate in the second half of 2026 on the back of earlier fertilizer price spikes.

The same pattern showed up on the consumer side of the ledger. Falling motor fuel prices should produce a headline consumer price index (CPI) decline in June, which would push real average hourly earnings up month over month. However, this pace of real earnings growth is unlikely to become the norm, since it partly reflects a fading income tax refund windfall that had offset the earlier energy price shock. Headline producer prices should see a far more muted rise in June for the same reason, though ongoing strength in core goods prices and a bounce in trade prices should still deliver a solid increase in core producer price index (PPI).

• Key Takeaway: The service sector’s price gauge has joined its manufacturing counterpart in pointing toward a peak, yet the descent looks unlikely to run smoothly, with food costs and core goods prices still pulling in the opposite direction.

Trade and the AI Ledger

The May trade deficit surged to $77.6 billion from $54.6 billion, as a 3.3% jump in imports outran a 3.2% decline in exports. The data point to a net trade drag north of 2 percentage points on second quarter GDP, larger than the 1.3 percentage point drag previously built into the baseline. Strong business investment and an offsetting boost from inventory accumulation should still keep GDP growth above 2% for the quarter.

The decline in exports traced mostly to industrial supplies, where a $6.2 billion fall in non-monetary gold exports did most of the damage. Despite the trend in non-monetary gold, industrial supplies exports actually rose 1%, bolstered by crude oil exports that surged after the closure of the Strait of Hormuz. The partial reopening of the Strait, following a memorandum of understanding (MOU) between the United States and Iran, has since pushed petroleum exports back toward pre-war levels, a shift that could widen the trade deficit further in June.

The rise in imports was broad based. Up $3.5 billion, consumer goods led the increase, with about half of that strength tied to pharmaceutical preparations, possibly a sign that businesses are frontloading pharmaceutical imports ahead of the 100% tariffs scheduled to take effect on July 31, though the policy carries many exemptions. Industrial supplies exports rose $3.1 billion and autos increased $2.2 billion, likely reflecting efforts to restock inventories that remain lean relative to sales.

Capital goods imports, including computers, computer accessories and semiconductors, rose $1.1 billion in May, even as exports of the same goods shrank $3.5 billion. Over the past year, capital goods imports have climbed 42%, compared with growth of just 2% for all other imports, a gap that keeps widening on the back of ongoing demand for AI hardware. Because the United States relies so heavily on electronics equipment sourced from abroad, the AI buildout has contributed next to nothing to GDP on a net basis so far, even as it adds roughly 0.35 percentage point to 2026 GDP growth through the investment channel alone, and any real cooling in AI optimism remains a genuine downside risk, both through weaker investment and a negative wealth effect. Think of the AI buildout as a delivery truck that unloads its cargo at the border and drives back out empty: the spending happens, but a large share of it never really enters the country’s own output.

• Key Takeaway: The AI buildout keeps widening the trade gap even as it keeps the domestic investment engine humming, a reminder that a chip imported from overseas registers as a drag on trade well before it shows up as a lift to growth, if it ever fully does.

The Consumer and Housing: A Two-Tier Economy

Consumer credit was essentially flat in May, slipping $0.2 billion, the first decline in outstanding credit since June 2025. A $5.3 billion drop in revolving credit slightly outweighed a $5.1 billion rise in nonrevolving credit. Revolving credit growth slowed to 3.4% year-over-year from 3.9% in April, while nonrevolving credit growth decelerated to 1.6% from 1.8%.

Revolving credit has absorbed the brunt of slower spending growth. Even as gasoline prices retreat, this year’s energy shock already squeezed real household incomes, pushing consumers to draw down savings or tap accumulated wealth to sustain spending rather than reach for a credit card. That dynamic should keep a ceiling on revolving credit as households prioritize rebuilding savings.

Delinquency data hint at why. The share of credit card balances more than 90 days past due has risen sharply over the past two years, even though the rate of transition into delinquency has stayed fairly stable since 2024, a pattern that looks less like a sudden wave of new financial stress and more like evidence that households already struggling are finding it harder to climb back out.

Nonrevolving credit, dominated by student and auto loans, showed the same split. Student loans fell $2.3 billion on a nonseasonally adjusted basis, with growth slowing to 3.9% year over year from 4.2% in April. Nearly 8 million borrowers had loans in forbearance under the SAVE plan before a federal court officially ended the program in March, and those borrowers must choose an alternate payment plan by July 1, one that will likely carry a higher monthly payment. New rules under the One Big Beautiful Bill Act (OBBBA), including a cap on graduate borrowing, add a further headwind this summer.

Excluding student loans, nonrevolving credit rose $4.9 billion, concentrated in auto loans on the back of a strong tax refund season and a rebound in equity markets, gains that tend to flow toward higher income consumers first. The expiration of the electric vehicle (EV) tax credit, tariff passthrough and payback for purchases frontloaded in 2025 all threaten to cool vehicle demand, and with it, loan growth later this year.

Housing told an identical story from a different room in the same house. Existing home sales fell 2.4% in June to a SAAR of 4.09 million, below the 4.2 million consensus forecast, though a revision lifted May sales to 4.19 million. The decline trimmed the second quarter residential investment forecast to a 0.7% annualized pace from an earlier 1.1%, even though housing still looks set to add to growth for the first time since the fourth quarter of 2024.

Sales stood 2.8% above year ago levels, but the headline concealed a stark divide: sales of homes priced at $1 million or more rose 18% year over year, while the lowest price tiers stayed flat or declined. This is a pattern consistent with affordability indexes showing that buying a home has grown far easier for upper income, largely homeowning households than for younger renters. Inventory slipped 0.6% month over month and rose just 1.3% year over year, the smallest annual gain since November 2023. This leaves 4.6 months of supply as mortgage rates near their yearly highs keep both buyers and sellers on the sidelines.

• Key Takeaway: Credit and housing are describing the same economy from two different vantage points: households with assets, equity and good credit keep spending and buying, while those without either pull back, and nothing in this week’s data suggests the two groups are about to trade places.

Final Thoughts

This week traded one open question for a handful of smaller ones. Chair Warsh’s first appearance before Congress is unlikely to move markets or the forecast by itself, and the more informative signal keeps arriving from underneath him: prices cooling on a second front, a labor market holding a steady summer rhythm and a widening gap between the consumer who owns assets and the one who does not. The weeks ahead bring a run of inflation, retail sales and housing data dense enough to change the picture and to show whether the gap between comfortable and  stretched consumers keeps widening or finally starts to close.

Oxford Financial Group, Ltd. is a SEC-registered investment adviser. Registration does not imply a certain level of skill or training. The information provided is for general informational purposes only and should not be considered investment, tax, or legal advice. Opinions are those of the author and are subject to change based on market, regulatory or economic conditions. Forward-looking statements are opinions and/or estimates and are not guarantees of future results. Data and opinions are based on sources believed to be reliable, including unaffiliated third parties such as Oxford Economics, but their accuracy cannot be guaranteed. Past performance is not indicative of future results. See important disclosures and disclaimers at https://ofgltd.com/home/disclaimers. OFG-2607-21

This week the loudest signal from the Federal Reserve came in the form of silence. Chair Kevin Warsh has persuaded most of his colleagues to stop narrating the policy outlook and to let the economic data carry the conversation, and the data offered a split verdict. The war in Iran is winding down and the energy shock that defined this year is fading, yet a more hawkish committee just pushed its first expected rate cut deeper into the future.

Executive Summary

• Markets and economists are diverging on the future path of interest rates. Oxford Economics pushed back its admittedly out of consensus forecast for the first Federal Reserve rate cut, to September 2027 from December 2026, a response to a more hawkish Federal Open Market Committee (FOMC), though the firm still expects the next policy move to point down rather than up. Futures markets, by contrast, now fully price an October rate increase and a second one by March 2027.
• The University of Michigan consumer sentiment index rose to 49.5 in June from 44.8 in May as gasoline prices eased. The average price of a gallon fell below $4 for the first time since March, though it still sits more than 30% above its pre-war level.
• Headline Personal Consumption Expenditures (PCE) inflation reached 4.1% in May, a level Oxford Economics expects to mark the peak as gasoline prices have fallen close to 10% in June. Core PCE inflation ticked up to 3.4%, kept stubborn by artificial intelligence (AI) demand for goods rather than services.
• Downward revisions to prior months left second-quarter consumer spending tracking a sub-2% annualized gain of 1.9%, below the 2.2% pace expected only a week earlier. The personal saving rate has slipped to 3%, from 4.6% in 2025, as flat real incomes push households to spend out of savings and stock-market wealth.
• Core capital goods orders rebounded 1.6% in May, lifting estimates of second-quarter business equipment investment to nearly 14% annualized, more than double the June baseline. The advance goods trade deficit, meanwhile, widened to $105.8 billion from $83 billion, as capital goods imports tied to the AI buildout jumped 42% from a year ago.
• New home sales fell 7.3% in May to a seasonally adjusted annual rate (SAAR) of 580,000, a possible floor rather than the start of a sustained decline, and Congress passed the 21st Century ROAD to Housing Act, a measure aimed at easing the supply shortage.

The Fed: Letting the Data Do the Talking

Kevin Warsh wasted no time turning his communication philosophy into committee practice. In the week after the meeting, members of the FOMC stayed unusually quiet, and of the few who spoke, only the regional presidents Austan Goolsbee, John Williams, and Neel Kashkari ventured remarks on the economy. Picture a film director who has finally convinced the cast to stop ad-libbing between takes: the script does the talking now, and this week the script was the data. Goolsbee warned that inflation sits too high with no guarantee it eases, Williams pushed his expected return to the 2% target out to 2028, a year later than he suggested in May, and Kashkari alone offered explicit guidance, saying he anticipates one rate hike this year. The quiet does not mean the disagreement has gone away. This is a committee that remains deeply divided, with incoming data, rather than speeches, likely to settle the dispute.

Markets are not waiting for the minutes. They now fully price an October rate increase and a second by March 2027, a repricing that has nudged the 10-year Treasury yield about 35 basis points above its pre-war level and flattened the curve. The tug-of-war that ran through the prior two weeks, fundamentals improving while the Fed refuses to declare victory, has not resolved; it has simply grown quieter.

• Key Takeaway: Warsh has muted the Fed’s chorus, yet the underlying argument continues. The committee remains split.

Energy: The Shock Finally Fades

Two weeks ago, this letter wondered whether the light at the end of the pipeline was daylight or an oncoming train. This week it looks more like daylight. Traffic through the Strait of Hormuz recovered to nearly half its typical pre-war level by midweek, and the fitful normalization of energy markets has become the dominant theme. The average price of a gallon of gasoline dropped below $4 for the first time since March, though it remains more than 30% above where it sat before the war, a reminder that relief and full recovery are not the same thing.

Consumers noticed. The University of Michigan sentiment index climbed to 49.5 in June from 44.8 in May, with the improvement reaching across every income group, although the index still sits 13% below its pre-war reading. Inflation expectations softened in tandem: the year-ahead measure eased to 4.6%, and the long-run measure slipped to 3.3%. Steadier expectations matter more than the levels themselves, because they give the Federal Reserve room to treat the oil spike as a one-off rather than the opening of a new inflation regime.

The plumbing behind the headlines is draining, too. Oxford Economics’ supply-chain stress tracker reached its highest level since 2022 in May, but the pressure came almost entirely from freight costs rather than the broad seizure of 2021 and 2022. Ocean freight rates ran nearly 40% above their pre-war average on costly fuel, and as crude prices fall, those rates should drift back down. Easing fertilizer prices tilt the risk to the food inflation outlook lower, a welcome turn given the earlier worry that food prices could accelerate toward 4.8% by early next year.

• Key Takeaway: The energy shock that drove much of this year’s pain is unwinding, slowly and unevenly, and the steadier inflation expectations that come with it hand the Fed a reason to view the oil spike as temporary rather than structural.

Inflation: The Peak Confirmed, the Core Still Stubborn

Headline PCE inflation came in at 4.1% in May, which might just mark the peak as gasoline prices have fallen close to 10% so far in June. The fever, to borrow the metaphor from earlier issues, appears to have broken.

The core tells a more stubborn story. Core PCE inflation nudged up to 3.4% from 3.3%, and the source of the stickiness is telling: it sits in core goods that the AI buildout and energy passthrough keep pushing higher, rather than in services, where price growth stays moderate. This is the awkward part for monetary policy because a rate hike does little to cool a semiconductor shortage.

The AI hardware story now shows up on price tags consumers recognize. Apple announced price increases of nearly 20% across its computer and tablet products this week, and Microsoft raised prices on its gaming consoles. Those moves echo the pressure already visible in producer and import prices for electronics, and they will feed through to final consumer prices over the coming months.

• Key Takeaway: Headline inflation has very likely crested, but the core stays sticky in the one corner monetary policy can barely touch, an AI hardware boom that keeps lifting electronics prices even as energy relief works its way through the system.

The Consumer: Resilient, but Spending the Reserves

The American consumer keeps showing up to work, even if the paycheck is not growing. Personal spending rose a solid 0.7% in May, but downward revisions to earlier months did the quiet damage: first-quarter spending now reads as a 0.5% gain rather than 1.4%, and the second-quarter tracking estimate has slipped to 1.9%, below the 2.2% pace this letter cited only last week. Strong months no longer offset the weak ones the way they used to.

Where the money comes from matters as much as where it goes. Incomes also rose 0.7% in May, but mostly on one-off farm assistance and other government transfers rather than wages, and real disposable incomes are flat against a year ago. To keep spending, households have run down savings and, at the higher end, tapped rising financial wealth. The personal saving rate has fallen to 3%, well below the 4.6% average of 2025. Think of a household quietly working through the rainy-day fund while telling itself the rain will stop soon.

The relationship between consumer sentiment and spending has not held in recent years, however, the recent energy price shock negatively impacted both. The first half of the year saw consumer spending growth slow to below 2%.  Although, sentiment has improved with cheaper gas, the recovery in power looks uneven. Low-income households, which spend a larger share of their budgets on gasoline, stand to gain most from cheaper energy.

• Key Takeaway: The consumer keeps spending, but more and more out of savings and stock gains rather than rising paychecks. That pattern can carry a quarter or two, but it grows harder to sustain the longer real incomes stay flat.

Investment, Trade, and Housing: Following the AI Money

Strip away the noise, and business investment is still running hard. Headline durable goods orders fell 4.5% in May, but a 14% drop in volatile transportation orders did all the work. The more telling core measure, nondefense capital goods orders excluding aircraft, rebounded 1.6%, and core shipments that flow straight into GDP rose for a fourth straight month. Business equipment investment looks set to grow 14% annualized in the second quarter, a step down from the 17% pace of the first quarter but more than double the June baseline. The AI buildout and the full up-front expensing of equipment under the One Big Beautiful Bill Act (OBBBA) supply the structural support, leaving higher interest rates as a marginal drag at most.

Trade, by contrast, looks likely to subtract from second-quarter growth. The advance goods deficit widened to $105.8 billion in May from $83 billion, as a 10.9% jump in imports outran an 11.8% fall in exports, the latter reflecting the reversal of the war-driven surge in petroleum exports. The standout is where those imports went: capital goods imports rose 42% over the past year on AI hardware demand, which is exactly why the AI buildout has added almost nothing to GDP on a net basis. The dollars spent on data-center gear largely leave the country to buy it. Even so, strong investment and inventory restocking should keep GDP growth above 2% for the quarter.

Housing closed the week on a calmer note than the headline suggested. New home sales fell 7.3% in May to a SAAR of 580,000, well below forecasts, yet that pace might just be the likely floor of a noisy range rather than the start of a sustained decline. The binding constraint is still inventory: the supply of completed homes for sale sits near levels last seen in 2009, which caps single-family construction until that backlog clears, and the median new home price held at $425,000, flat against a year ago. Congress added a longer-term wrinkle by passing the 21st Century ROAD to Housing Act, which should indirectly support new construction, with lawmakers watering down the controversial build-to-rent restrictions from earlier drafts before passage.

• Key Takeaway: AI is the center of gravity in the real economy right now, driving an investment boom and an import surge at the same time, which is why the buildout barely shows up in net GDP even as it reshapes prices, trade, and the equipment cycle.

Final Thoughts

This week the Fed turned down its own volume, and the economy filled the silence with a familiar mix of progress and friction. The war is winding down, gasoline has dropped below $4, headline inflation has very likely peaked, and business investment keeps powering ahead on the back of AI. Against that, the core of inflation stays sticky in goods, the consumer is funding its spending out of savings rather than raises, and a more hawkish committee just pushed its first expected cut a full year further out. The result is an economy that keeps performing better than feared while the Fed keeps waiting for proof, which is precisely the standoff that has shaped the past month. The light at the end of the pipeline does look more like daylight than it did two weeks ago; the trick now is not to mistake a quieter Fed for a finished one.

Oxford Financial Group, Ltd. is a SEC-registered investment adviser. Registration does not imply a certain level of skill or training. The information provided is for general informational purposes only and should not be considered investment, tax, or legal advice. Opinions are those of the author and are subject to change based on market, regulatory or economic conditions. Forward-looking statements are opinions and/or estimates and are not guarantees of future results. Data and opinions are based on sources believed to be reliable, including unaffiliated third parties such as Oxford Economics, but their accuracy cannot be guaranteed. Past performance is not indicative of future results. See important disclosures and disclaimers at https://ofgltd.com/home/disclaimers. OFG-2606-81

This week brought Chair Kevin Warsh’s inaugural Federal Open Market Committee (FOMC) meeting, a memorandum of understanding between the US and Iran, and retail sales that surprised to the upside. The combination reads a bit like a plot twist in the second act: just as one source of inflationary pressure begins to ease, a new voice arrives at the Fed with a different script entirely.

Executive Summary

• Oxford Economics lowered its 2026 Consumer Price Index (CPI) inflation forecast from 3.6% to 3.3%, driven by a lower oil price path following the US-Iran agreement. Brent crude has slid to nearly $80 per barrel, the lowest price in over three months. Gasoline prices appear on track to decline more than 9% in June, subtracting roughly 0.3 percentage points from headline CPI.
• In his first meeting as chair, Kevin Warsh produced a dramatically slimmed-down policy statement, and the committee stood roughly divided, with nine participants projecting rate hikes this year and a similar number expecting cuts by end-2027. Markets responded by fully pricing in an October rate hike.
• Retail sales rose 0.9% in May, beating expectations, with underlying control group sales up 0.7%. Second-quarter real consumer spending now appears on track for a 2.2% annualized gain, well above the 1.4% pace in the first quarter.
• Housing starts fell 15.4% in May to a seasonally adjusted annual rate (SAAR) of 1.177 million, with multifamily starts plunging 40.2%. Building permits suggest the decline will reverse, pointing to a June rebound.
• Business inventories posted a third consecutive monthly gain in April, rising 0.5%, and the inventory cycle should provide a larger boost in the second half as oil stocks drawn down during the Iran war are replenished.

The Fed: New Voice, Familiar Tune

Kevin Warsh wasted no time putting his stamp on the Federal Reserve. In his first meeting as chair, he stripped the policy statement down to little more than a factual summary of economic conditions, gutting the prior format. He also declined to offer his own economic projections, though 17 of 18 participants submitted rate forecasts for this year and next. Think of it as a new restaurant owner rewriting the entire menu on day one; the kitchen is the same, but the presentation could not be more different.

The projections that did emerge paint a hawkish picture. The median official now expects headline and core inflation well above 3% by the end of 2026, with core inflation reaching 2.5% by end-2027. The committee stands roughly divided, with nine participants seeing one or more hikes this year while a similar number expect cuts by end-2027. Some participants also raised their estimates of long-run neutral rates, a signal that certain officials believe rates may need to stay higher for longer even after inflation cools.

Markets did not sit on the fence. They responded to the hawkish language by fully pricing in an October rate hike, leaving Oxford Economics in an increasingly lonely position still forecasting a cut this year. Their conviction rests on inflation falling faster than the median FOMC projection as energy and tariff pressures fade in the second half, though the risk is that the Fed stays on hold longer than anticipated.

• Key Takeaway: Chair Warsh has rewritten the Fed’s communication playbook, but the underlying policy dilemma, balancing inflation concerns against a labor market that is not overheating, remains the same one his predecessor faced.

Inflation: The Pressure Valve Opens

The memorandum of understanding between the US and Iran has opened something resembling a relief valve for inflation. Oxford Economics lowered its 2026 CPI forecast from 3.6% to 3.3%, a meaningful revision reflecting a lower path for global oil prices. West Texas Intermediate (WTI) crude has already fallen $10 per barrel this week to $77, and some economists are now expecting prices to ease gradually below $70 by year-end.  However, the reaction function between the reopening of the Strait of Hormuz and global oil supply returning to pre US-Iran conflict levels will likely be longer and choppier than most market participants seem to expect so this path is likely to be a volatile ride rather than a linear descent.

The timing matters. Gasoline prices appear on track to decline more than 9% in June, subtracting roughly 0.3 percentage points from headline CPI. If the deal holds, headline inflation likely peaked in May. That is a meaningful shift from just a few weeks ago, when elevated energy costs looked poised to keep inflation stubbornly above 4% through the summer.

Import prices tell part of the story. They rose 1.9% in May, pushing the annual gain to 6.7%, the strongest since August 2022. Fuel imports jumped 12.5% month over month, but the import price index measures prices at the beginning of the month, so May’s data mostly captured the April run-up rather than the subsequent decline. Nonfuel import prices remain sticky at 3.7% year-over-year, led by capital goods prices up 5.6%. Computer and electronic accessories prices jumped another 3.6% in May, thanks to the artificial intelligence (AI) buildout. That stickiness in core goods, combined with lingering tariff effects, helps explain why the Federal Reserve will likely stay on hold for most of 2026 even as headline inflation improves.

At the same time, with productivity growth running above 2% and wage growth near 3.5%, well below the roughly 4.5% threshold that would threaten the 2% inflation target, the wage-price spiral that some officials fear does not appear to be materializing. Today’s inflation problem sits in energy and the AI goods buildout rather than in labor costs.

• Key Takeaway: The Iran deal has provided tangible inflation relief and may have marked the peak in headline CPI, but sticky nonfuel prices fueled by AI demand and tariff passthrough will keep the Fed cautious.

The Consumer: Defying the Script

American consumers, it seems, did not get the memo that they were supposed to pull back in May. Retail sales rose 0.9%, handily beating expectations of a 0.6% increase. Even stripping out fuel, control group sales came in at a solid 0.7%, helped by strong nonstore (online) sales.

Part of the explanation lies in tax season. This year’s refunds ran nearly 20% larger than a year ago, skewed toward higher-income households who tend to file later and spend more gradually. Through May, the cumulative size of refunds more than offset the drag from higher gasoline prices, but that balance is shifting and will turn negative by the end of summer.

The result: second-quarter real consumer spending now appears on track for a 2.2% annualized gain, well above the weather-depressed 1.4% pace in the first quarter. The personal saving rate has already fallen sharply and likely declined further in May. Consumers are spending, but they are doing so partly by saving less, a pattern that can sustain itself for a quarter or two but becomes harder to maintain over time.

The labor market provides a floor. Initial jobless claims fell 4,000 to 226,000 in the week ended June 13, and despite the four-week moving averages edging higher, Oxford Economics views the increase as a move off a recent bottom rather than the start of a deterioration. Payroll gains have averaged 92,000 over the past six months, a pace that suggests stability without overheating.

• Key Takeaway: The consumer remains the economy’s most reliable engine, but the fuel mix is changing. Tax refund support is fading, the saving rate is declining, and spending growth likely moderates in the second half.

Housing: Noise in the Numbers

The headline on housing starts looked alarming: a 15.4% plunge in May to 1.177 million SAAR. But the details tell a far calmer story. The decline came almost entirely from a 40.2% collapse in multifamily starts, while single-family starts fell a much more modest 1.9%. Building permits tell a more stable story; the level of multifamily permits points to a rebound in June.

Homebuilder sentiment slipped two points in June to 35 on the National Association of Home Builders (NAHB) index, with all three components below 50. Builders continue to wrestle with a glut of completed unsold homes, still near levels last seen in mid-2009. The share of builders offering price cuts rose to 35% from 32% in May. Think of it as a car dealership with too many vehicles on the lot; until the inventory clears, the factory keeps the production line at a crawl.

The surprise came from buyers rather than builders. Pending home sales jumped 3.8% in May, a result that surpassed expectations and arrived despite mortgage rates climbing to their highest level in nine months. The increase occurred across all regions, with the Northeast and Midwest leading, and because pending sales lead existing home sales by one to two months, the data point to higher closings in June.

Taken together, the second-quarter housing data paints a picture of a market more resilient than anticipated.

• Key Takeaway: The May housing starts number was a multifamily mirage. The broader housing market is holding up better than expected, though builders need to clear inventory before construction picks up in a meaningful way.

Industry and Inventories: The Quiet Engines

Industrial production grew by just 0.1% in May, below expectations, but the underlying story remains constructive. April’s reading received a 0.2 percentage point upward revision to 0.9%. The sectors driving growth showed no signs of losing steam: business equipment production rose 0.6% month over month and stands 5.6% higher over the prior 12 months, while computers and electronics production has averaged 1.2% monthly gains over the prior five months.

The soft spots sit in petroleum-dependent industries. Chemicals, plastics, and rubber posted consecutive monthly declines as the Iran war kept oil prices elevated. Domestic crude inventories have declined 10% since the start of the war and now sit at their lowest level since 2022. Those stocks will need rebuilding, giving mining output a lift over the rest of the year.

The inventory cycle adds another layer of support. Business inventories posted a third consecutive gain in April, with broad-based increases driving a 0.5% monthly rise. The nowcast for the inventory contribution to second-quarter Gross Domestic Product (GDP) growth sits at 0.2 percentage points. Think of inventory restocking as the economy filling its pantry after a long stretch of eating through the reserves. Manufacturing purchasing managers still report that customer inventories are too low, suggesting the restocking cycle has room to run. The bigger boost comes in the second half as producers replenish lean oil stocks.

The wildcard is trade policy. The administration plans to transition from Section 122 tariffs to the more durable Section 301 tariffs, a shift likely to inject volatility into both import and inventory data in the months ahead.

• Key Takeaway: Industrial production is riding tailwinds from fiscal policy, AI investment, and an inventory restocking cycle that should accelerate in the second half, provided the Iran deal holds, and trade policy disruptions remain manageable.

Final Thoughts

This week crystallized a theme likely to define the second half of 2026: the push and pull between improving fundamentals and a Federal Reserve that has not yet declared victory. The Iran deal delivered possible tangible relief on the energy front (if the deal holds), the consumer continues to spend at a pace that exceeded most forecasts, and the inventory cycle is building momentum. But Chair Warsh made clear in his debut that the bar for policy action remains high, and the committee’s internal divisions suggest that any shift will demand convincing data rather than encouraging trends. The economy is performing better than feared, which, in one of those paradoxes that keeps monetary policy endlessly fascinating, may be precisely what keeps the Fed on hold.

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