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.

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