Last week, we had a significant event that probably captured more attention than usual especially considering we are in the heart of the normal quiet cycle period with minimal new data. It was the first Federal Reserve meeting, rate decision, and press conference under new Fed chair Kevin Warsh.
The Fed’s decision to hold its benchmark rate steady was the non-event everyone expected. Instead, the market initially reacted to the written statement release and dot plot. In Cornerstone’s opinion, however, the more consequential developments were what Chair Warsh announced alongside them.
Let's first touch on the rate statement itself. The committee removed forward guidance language, and with it, any reference to the standing dual mandate commitment timeline as well as the entire paragraph on assessing incoming data.
What was left was a concise, stripped-down statement of roughly 130 words ending with, “The Committee will deliver price stability.”
Chair Warsh was explicit and intentional in his press conference. The market initially read it as a signal and the 10-year Treasury yield jumped:
We think it’s worth taking a step back to read these changes as an overall philosophy.
When looking at the new dot plot release, most will immediately point to the median participant placing the federal funds rate at 3.8% to end 2026, which is an increase from 3.4% in March. In our opinion, the top line number alone overstates any directional signal because split opinions within the Fed are as prevalent as ever.
Nine participants see rates moving higher by year end and nine see them at this level or lower:
While the median number shifted up, the conviction behind it didn’t.
The shift in dot plots shouldn’t be a surprise. This data was merely catching up with old information. The last Fed data release was in March, which was within a couple weeks of the start of the Iran War. We think this reflects a divided committee waiting for further data and preserving optionality.
So, we learned nothing new from a pure data projection standpoint. The key new information was Warsh’s announcement of five task forces looking into how the Fed operates and what can be improved to help it achieve what it’s failed to deliver in recent years.
Warsh specifically framed this priority process as starting with “first principles” and that he was recruiting minds from both inside and outside the economics profession.
These five task forces will each address a different topic:
- Communications
- The balance sheet
- Reliance on existing data sources
- Productivity and jobs in an era of transformation
- Inflation frameworks
Taking the first principles approach, the task forces will be charged with asking hard questions, examining current practices, considering alternatives, and proposing next steps.
The second important commentary by Warsh was about his preferred inflation gauge philosophy. He discussed his overall complaint that official data rests on, “old fashioned surveying methods” and “echoes of history,” rather than actual, timely information.
This philosophy is based in gauging underlying inflation by using trimmed average inflation measures rather than “current standard measures.” The difference is the trimmed average approach strips out tail-end outliers each month rather than merely removing fixed categories like food and energy, regardless of their behavior. It sorts components by their price change that month and drops the most extreme movers at both ends of the distribution.
Interestingly, a perfect example of this was seen in the most recent producer price index reports. The headline PPI number came in hotter than expected. But when looking at the details under the surface, analysis showed investment and advisory fees increased 4.8% month-over-month. That accounted for 60% of the total increase.
This is a direct result of the parabolic move in the market in Q2. It’s the type of outlier extreme that is stripped out using a trimmed average inflation standard.
For perspective from a headline standpoint, the trimmed mean average has run at 2.3% over the previous 12 months compared against core personal consumption expenditures at 3.3% over the same period:
In viewing the Fed’s 2% inflation target, it turns out this average measure reads significantly closer than the standard, non-dynamic philosophy. Importantly, when considering the potential effects of this philosophical change, how did markets react?
While there was an immediate price drop, after time to digest the new information completely overnight, the market popped right back, almost as if nothing happened:
With his first press conference done and a better understanding of how the market would respond to Fed changes, we can glean insight with some additional data points. It’s important to recognize after some early June volatility, the overall markets began to normalize in the immediate lead up to last Wednesday's press conference. We believe there are a handful of data sets that have driven this recent leveling of the market.
First, leading up to the Fed press conference, overall inflows outnumbered outflows by an almost two-to-one ratio:
This was an indication that early June volatility wasn’t a flight to safety, but was cash being raised first and investors figuring out where to put it second. This inflow strength provided the foundational support needed for MoneyFlows’ trusty Big Money Index to level out:
Next, as pundits highlighted concerns about inflation, credit markets barely moved. This is a signal of the highest order.
Credit markets are the bellwethers for systemic stress. Even on the heels of an elevated inflation reading, investment grade spreads at 0.73% and high yield spreads at 2.66% hardly budged, staying near multiyear lows:
If bears were right, spreads would widen significantly.
Third, from a pure equity market standpoint, the single most important thing to understand about 2026 thus far is not necessarily what the market gained, but instead what it has shrugged off.
Every time a headline screamed danger, the S&P 500 absorbed it and kept climbing. This resilience shows the strength of underlying fundamentals overriding emotional, headline developments.
Lastly, while not discussed enough, the bond market’s 10-year break even inflation rate is reflective of average inflation expectation over the next decade. It’s 2.32%, as of June 16.
This means there’s a gap of 148 basis points between current inflation and the bond market’s forward-looking expectation:
The bears cite 3.8% inflation while bond markets think inflation will average 2.32%. It’s impossible for these numbers to both be right.
This divergence is important when you understand bond markets discount future conditions while the consumer price index is a backward-looking monthly snapshot. Interestingly, the bond market’s approach is extraordinarily similar and consistent with new Fed chair Warsh’s preferred trimmed average inflation philosophy.
The forward-looking expectation keeps falling as the backward-focused number rises. For objective, data-driven investors, that’s a divergence worth watching.
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