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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