Weekly Economic Trends and Indicators
As the first half of the year winds down, a number of recent developments have the potential to affect the outlook for the rest of 2026. Among these developments are new leadership at the Federal Reserve, lower oil prices, and how both of these will impact inflation.
On Tuesday and Wednesday of this week, the new chair of the Federal Reserve Board, Kevin Warsh, led his first monetary policy meeting since taking office in May. The Federal Open Market Committee (FOMC) voted to leave the policy interest rate unchanged, as expected. The real news was in the Summary of Economic Projections and in Warsh’s comments in the press conference after the meeting.
Fed officials lowered their projections for 2026 real GDP growth from 2.4% in March to 2.2% in June. They also raised their projections for inflation this year from 2.7% in March to 3.3% in June. Due to the higher inflation expectations, nine members of the FOMC indicated in their projections that they expect an interest rate increase by the end of 2026.
However, in his remarks at his first press conference, Warsh noted that this meeting’s policy statement did not have the usual “forward guidance” that indicates which way the Fed might be leaning. In answer to a question from a reporter, Warsh cautioned against reading too much into the “dot plot,” as the Summary of Economic Projections is commonly known. He stated, “That’s to say that I think my colleagues around the table when they submitted their dots, understand the world is changing quite quickly. And they didn't feel bound by them six weeks from now or six days from now, and in the event that their circumstances change.”
In other words, inflation and GDP forecasts—and the interest rate increases or decreases the market may be expecting—are not set in stone. Conditions are changing rapidly.
As if to underscore this point, the recent memorandum of understanding between the U.S. and Iran caused the price of a barrel oil to fall into the mid-$70s this week, down from over $90/barrel earlier this month. While oil is unlikely to return to $60/barrel in the near-term even if the cease-fire holds, a $70-80 range would take pressure off the inflation rate and bring inflation expectations back under 3%.
Markets, however, are not convinced that the recent drop in the price of oil is enough to prevent a rate hike. CME FedWatch reports that the market’s implied probability of a rate increase continues to rise for the next few meetings with an 86% probability of a rate increase sometime between now and the end of the year.
The market is grappling with the supposed conflict between the Fed’s dual mandate of full employment and price stability. Many believe that solving the inflation problem will require higher rates, but Warsh is not committing to that. For one thing, he expressed the need for more research on the drivers of inflation and on productivity, including the impact of AI. This is in keeping with previous statements he has made about the disinflationary impact of productivity increases.
If inflation does not respond to the drop in the price of oil and continues to remain elevated through the summer, Warsh may find it difficult to hold off members of the committee who will inevitably want to raise the policy rate. If this happens, then it would shave a few tenths of a percent off GDP growth in the 3rd and 4th quarter. However, if the recent spike in inflation turns out to be simply a reaction to temporarily high oil prices, then we could see level interest rates and GDP growth closer to 2.4%, or possibly higher, for the remainder of the year.
Next week: Inflation update
