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Highlights
We expect that the FOMC statement will move to a neutral bias this week, but hawks will argue for a move straight to a hiking bias. Whether they will be successful depends on Warsh.
We think that Fed officials will eventually conclude that it’s preferable to recalibrate policy sooner than later rather than risk a steeper rise in rates if core inflation continues to rise.
Our read of the data argues for a 70% chance of a rate hike in September. As noted earlier, we think underlying inflation is sticky and the labor market recovering. Moreover, if oil stabilizes here or falls further, resources will transfer back from oil producers to oil consumers and households will have the capacity to bear higher core inflation.
Wall Street Journal 6/17/26
Federal Reserve officials signaled Wednesday that their next move may be to raise interest rates, not cut them, a striking reversal at Kevin Warsh’s first meeting as chairman and a sign of how sharply the inflation outlook has turned.
The Fed held its benchmark rate steady, in a range of 3.5% to 3.75%, in a unanimous vote. But officials’ quarterly economic projections told the story of the shift: Nine of 19 officials penciled in at least one rate increase by year’s end, up from none in March. Just one foresaw a cut, down from 12.
Investors had braced in recent weeks for a higher-for-longer posture from the Fed, but this was sharper and reflected a committee inching from a watchful hold toward readiness to raise rates.
Bottom Line
The Fed is missing only on one side of the mandate. Holding rates steady at this point will become increasingly untenable if the labor market rebound continues. At this point, the Fed does not need to hike rates aggressively and put upward pressure on the unemployment rate as it did in 2022. Presumably, the Fed prefers not to recreate that episode. To avoid a 2022 redux, Fed hawks will argue the need to take back some of last year’s rate cuts, and to do so quickly given that additional inflationary pressure from the energy shock puts downward pressure on real rates and aggravates an already worsening inflation picture.
Wall Street Journal 6/17/26
Wednesday’s interest-rate projections showed that Federal Reserve officials were a little more hawkish than many investors had anticipated.
Heading into the meeting, most investors expected that officials’ median interest-rate forecast for the end of 2026 would nudge up to at least 3.6% – the current level of rates – from the last forecast of 3.4%. In the end, however, enough officials projected a rate increase that the median forecast climbed all the way to 3.8%.
That was a blow to stocks and bonds, with major stock indexes turning negative and short-term Treasury yields climbing sharply.
This item is part of a Wall Street Journal live coverage event. The full stream can be found by searching P/WSJL (WSJ Live Coverage).
Oil Shock Fears Overstate Near-Term Risks to Consumers
Fed speakers and clients frequently cite expected consumer weakness due to higher energy costs as reason to be cautious about economic growth. We believe such concerns are likely overstated for two reasons. First, inflation weighs on measured activity but like in 2022 this is more an artifact of data construction rather than a sustained change in the pace of activity. Second, we think that the Bureau of Economic Analysis (BEA) income measures understate household purchasing power. If we are correct, the Fed is overestimating the fragility of consumer spending.
FT 6/17/26
US shoppers stepped up spending in May as bumper tax refunds offset the inflationary effects of the Iran war, signalling the economy remains in robust shape as Kevin Warsh takes the helm at the Federal Reserve. Retail sales in May rose 0.9 per cent from the previous month to $764bn, according to data released by the Census Bureau on Wednesday, ahead of Wall Street expectations. They were up 6.9 per cent versus May 2025. Much of the increased spending was driven by elevated prices at the pump, with petrol station sales rising 3.4 per cent. But underlying retail sales were also strong, with a core measure stripping out volatile items including fuel and car sales gaining 0.7 per cent.
While holding the cash rate at 4.35% this month is expected, the more important question is no longer whether the Reserve Bank of Australia (RBA) hikes again — it is when it cuts.
We expect Governor Michele Bullock to use her press conference to retain hawkish guidance and keep the door nominally open to an August move, but the data since May 5 have shifted the balance of risks materially.
Another hike is looking less likely — and a rate cut has moved from a distant prospect to the next likely move.
Bloomberg 6/16/26
Australia’s central bank kept open the
possibility of further policy tightening on Tuesday after
leaving its key interest rate unchanged, as Governor Michele
Bullock argued that inflation could still go either way.
The Reserve Bank’s nine-member board unanimously held the
cash rate at 4.35%, its first pause of the year, in response to
signs that a trio of hikes are beginning to weigh on the
economy.
Bottom Line: Ueda’s hospitalization is a logistical complication, not a policy one. With Himino chairing and Uchida at the podium, the BOJ will proceed to raise its key policy rate 25bps to 1% on June 16 — the first hike in six months and the highest rate since 1995.
Bloomberg 6/16/26
The Bank of Japan raised its benchmark
interest rate to the highest since 1995 and pledged more hikes
to come, fueling speculation of another move before the end of
the year.
Set aside commentary from the most senior Bank of Japan (BOJ) officials participating in this week’s BOJ-hosted international banking conference in Tokyo — the most significant marker for a rate hike at next month’s meeting will come on June 3.
We are confident in a 25 basis point BOJ hike on June 16, with October 29-30 a next window for another move to 1.25%.
Bloomberg 6/16/26
The Bank of Japan raised its benchmark
interest rate to the highest since 1995, at a regular monetary
policy meeting convened without the governor in attendance.
The BOJ increased its benchmark rate by a quarter
percentage point to 1%, according to a statement Tuesday
There are subtle but important signs that the Islamic Republic of Iran (IRI), or at least Tehran’s civilian leadership, is bending to US President Donald Trump’s most important red lines over its nuclear program for a negotiated end to the war. In exchange, although unverified, it appears clear that the United States has floated monetary concessions to the IRI for concessions on nukes and a reopening of the Strait of Hormuz (more on that below).
That said, internally divided, and emboldened also by domestic US partisan divides and economic pressure on the Trump administration, there is a strong possibility that Tehran continues to slow walk negotiations, or is unable to move quickly enough to provide resolution to an increasingly impatient Trump on opening the Strait of Hormuz.
With that in mind, we think there are probably better than even odds that the US and Israel could resume military action against Iran by next week as threatened by Trump. Either way, we predict that Hormuz will be opened within a month.
Bloomberg 6/15/26
The US and Iran reached an interim peace agreement to reopen the Strait of Hormuz and move further toward ending a 15-week war that’s wrought chaos across the Middle East and reverberated through the global economy.
The development caused equities and bonds to jump at the start of the week, while oil and natural gas prices — which soared with the strait’s closure — slumped.
US President Donald Trump, under pressure as rising fuel costs hit him and his Republican Party ahead of midterm elections in November, hailed a “great deal that will bring peace and security to the whole region.”
European Central Bank (ECB) officials are squarely focused on assessing the medium-term impact of the ongoing energy crisis on euro area inflation. Beyond the length of the war, and its impact on key infrastructure, the Governing Council’s (GC) rate path will be determined by the passthrough of higher commodity prices to headline inflation, and the second-round effects it could trigger through higher wages.
The latest surveys assessing businesses’ price selling expectations, consumer inflation expectations, and input and output costs all signal the damage already done has been enough to alter the behavior and expectations of all key economic actors. This was further confirmed yesterday by the euro area March flash inflation reading, which shows headline inflation is expected to have risen from 1.9% in February to 2.5%, the highest level since June 2024.
This will require the ECB to tighten its monetary policy, and June remains the baseline scenario for a 25bps rate hike. Most officials think that hiking in April would be too hasty because while inflationary pressures are mounting, interest rates are already at neutral, inflation has been on target for a year, and inflation expectations up until last month were firmly anchored.
AFP 6/11/2026
The European Central Bank on Thursday raised its benchmark interest rate for the first time since 2023 as the Middle East war stokes inflation, despite concerns the move could hit the struggling eurozone economy.
The ECB lifted its deposit rate a quarter point to 2.25 percent, becoming the first major central bank to tighten monetary policy in response to the energy shock unleashed by the conflict.
The ECB also raised its inflation forecast for this year to three percent, up from a previous estimate of 2.6 percent in March.
And the central bank cut its eurozone growth projection for this year to 0.8 percent from 0.9 percent.
Bottom Line: Schnabel has again taken the initiative to effectively confirm the ECB cannot afford to look through the energy crisis and will hike interest rates in June. The shock’s persistence, higher inflation expectations, and production costs make another hike in September part of our baseline scenario. Weaker consumer confidence and overall economic sentiment, plus the eventual re-opening of Hormuz, should limit the cycle to two hikes in 2026. But Schnabel and other hawkish officials are open to a third one if the outlook requires it.
FRANKFURT, Germany (AP) 6/11/26
The European Central Bank on Thursday became the first major central bank to raise interest rates in response to the Iran war as policymakers around the world including new U.S. Federal Reserve Chair Kevin Warsh wrestle with how to confront the inflation fed by sharply higher oil prices.
The ECB’s rate-setting council raised its benchmark rate to 2.25% from 2%, where it had been for a year. The move comes ahead of rate-setting meetings next week at the Fed, the Bank of Japan, and the Bank of England.