Remaining Jay$ Press Conferences - 8
Last Week This Morning
- 10T: 4.41%
- 2T: 3.95%
- SOFR: 4.28%
- Term SOFR: 4.31%
- CPI Inflation Data was better than expected across the board
- CPI m/m: 0.1% actual vs 0.2% expected
- CPI y/y: 2.4% as expected
- Core CPI m/m: 0.1% actual vs 0.3% expected
- Core CPI y/y: 2.8% actual vs 2.9% expected
- U Mich. Consumer Sentiment: 60.5 actual vs 53.6 expected
Quid Pro Quo
Including Wednesday, Powell has 8 FOMC press conferences remaining as Fed Chair. Powell’s term expires May 2026 and Trump has reassured markets that he won’t try to force Powell out before then, but I don’t think it matters.
Whoever Trump nominates is going to make assurances about cutting rates, right? I never heard the phrase “quid pro quo” more than I did during the first impeachment of Trump in late 2019, but I think it’s about to make a reappearance.
“If I nominate you, will you cut rates?”
“Of course.”
“But we’ll tell everyone you’re independent, right?”
“Obviously.”
Trump could kneecap Powell any day now. His camp floated the Bessent trial balloon to see how the market would react and in general, the market likes Bessent.
Not surprisingly, the market responded by pricing in more cuts beginning in June of next year. “The combination of high-volume selling of the March 2026 contract and buying of the June 2026 contract amounts to a bet that the central bank will cut interest rates in the interim.”1
It’s not that easy, though. The Committee has 12 voting members and the President has very little control over that composition.
- 7 Board of Governors with 14 year terms
- 5 Regional Bank Presidents that rotate in and out (the NY President is a permanent voting member)
Even if Trump tries to front run the 2026 regional bank presidents that are rotating onto the Committee, he can’t. Each regional bank has its own 9 member Board with staggered terms. NY Fed President John Williams’ term expires in February, but again, that position is filled through the Board of Directors. It’s almost like it was set up in a way to make it hard for a single person to determine interest rates…
Here’s Bloomberg’s take on the current dove/hawk composition. February’s rotations should result in a slightly more dovish bend next year.
Take that, paired with a dovish Fed Chair, getting to the far side of the inflation burst, my belief that the economy will have slowed substantially…and I think Fed might be cutting below 3% by y/e 2026 to stimulate the economy. And with the mid-terms just a few months later, I can already see the headlines claiming the Fed is cutting for political reasons.
One thing I feel pretty confident about – the Fed is not hiking. You’ve seen this graph before. I use it to illustrate the difference between pressing on the gas pedal or hitting the brakes, but it also does a good job of illustrating how much cushion the Fed has before it needs to hike. Even in the unlikely event inflation spikes above Fed Funds, it will be temporary. The Fed won’t view a month or two of negative real rates as stimulative.
Most economists expect Core PCE to climb to 3.5%-4% over the next several months before retreating below 3% once the initial burst wears off. Buckle up, the media is going to eat it up.
A Precise Lead Pipe Lock Timeline
Here’s a timeline of how inflation may play out if we don’t see trade deals struck.
July 2025: 3.1% - Initial tariff effects begin showing in Core PCE as April tariffs work through supply chains. The 2-3 month lag typical for import price transmission means July represents the first significant impact month. Weak attempts are made to connect July heat wave to hot prices. Trump tells Fox that he intends to nominate Bessent as the next Fed Chair.
August 2025: 3.7% - Peak velocity of tariff pass-through occurs. Federal Reserve Bank of Boston models suggest the steepest month-over-month increases happen 3-4 months post-implementation as inventory effects fade and full tariff costs hit consumers. Despite my best efforts to warn them, people start freaking out, wondering if the Fed will have to hike. Powell wonders if he bought enough tequila before tariffs hit.
September 2025: 4.3% - Near-peak tariff impact reached. Goldman Sachs forecasts suggest Core PCE approaching its maximum tariff-induced level, with full pass-through of the 10% universal tariff plus partial effects from country-specific rates. Dallas Cowboys fans tell anyone that will listen that this is their year.
October 2025: 4.7% - Peak month for tariff-induced Core PCE inflation. Fed economists project this represents the maximum impact assuming complete pass-through, with Core PCE nearly doubling from pre-tariff levels. Penn State upsets Oregon at home in a White Out game for the ages. Penn State is #1 in the country!
November 2025: 4.2% - First signs of base effect moderation. While absolute prices remain elevated, the year-over-year calculation begins incorporating some higher comparison months from 2024, slightly reducing the inflation rate. Penn State loses to Ohio State like they always do. Fed says worst is behind us and cuts are justified as unemployment hits 4.8%.
December 2025: 3.8% - Continued base effect retreat begins. The mathematical mechanics of inflation measurement start working to reduce reported inflation rates even as absolute price levels remain high. Texas Longhorns spend the month ranked #1 even though they haven’t beaten anyone. Tell anyone who will listen that this is their year.
January 2026: 3.5% - Steady normalization continues as year-over-year comparisons now include several months of elevated 2025 prices. The tariff shock begins transitioning from active driver to embedded baseline. Fed tries to convince everyone they need to cut. Cowboys lose in the first round of the playoffs.
February 2026: 3.2% - Further base effect moderation accelerates. Supply chain adaptations and demand adjustments contribute to slowing price momentum beyond pure mathematical effects. Eagles win second consecutive Super Bowl. Grease the poles!
March 2026: 3.0% - Approaching the one-year anniversary of tariff implementation. Year-over-year comparisons now include pre-tariff months from early 2025, maintaining some elevation above target. Powell pulls a worn Key West brochure out of his desk drawer and stares at it longingly.
April 2026: 2.8% - Critical inflection point as comparisons shift to include the April 2025 tariff implementation month. The steepest base effect impacts occur here, dramatically reducing measured inflation. Fed is behind the curve as unemployment climbs through 5%.
May 2026: 2.6% - Near-complete base effect normalization. Core PCE approaches but remains slightly above the Fed's 2% target due to lingering secondary effects and potential monetary policy responses. Powell holds his last press conference in a Margaritaville t-shirt and sunglasses. A Key West brochure flutters to the ground.
June 2026: 2.5% - Return to pre-tariff inflation baseline. The full cycle completes with Core PCE back at starting levels, though absolute prices remain permanently 4-5% higher than they would have been without tariffs. Consumer spending has fallen off a cliff. Unemployment is climbing to 5.5%. Bessent cuts rates and signals Fed Funds is going to 2.5%. Trump accuses him of playing politics to help the Dems in the midterms.
FOMC – “Fed Only Expects One Cut This Year”
We get an updated Summary of Economic Projections (SEP). The headlines will focus on the median dot plot suggesting one cut this year, down from two cuts at the March meeting.
Otherwise, I think this will be a slightly hawkish presser. Powell is bracing for the inflation effect and he needs to keep expectations reined in.
I doubt anything happens that causes the T10 to break out of its range.
The Week Ahead
Fed meeting and the speeches afterward to fine tune the market response, developments out of the Middle East, tariffs, trade deals…take your pick.
Happy Father’s Day, everyone!
