When Kevin Warsh steps to the Federal Reserve podium at 2:30 p.m. Eastern on Wednesday, the May consumer price index will be in his hand. Headline inflation came in at 4.2 percent year over year, the highest reading since April 2023, and core at 2.9 percent. The dot plot he releases with the policy statement is the first market-moving act of the new regime, and it must answer one question: is the disinflation done.
The Print Behind the Pause
The May CPI delivered 0.5 percent month over month and 4.2 percent year over year, in line with the Dow Jones consensus. Energy carried the print, with the energy index up 3.9 percent on the month and 23.5 percent year over year, almost entirely the war premium in crude oil. Strip energy out and the picture is more reassuring. Core CPI rose 0.2 percent on the month and 2.9 percent annually, and core commodities actually posted a 0.1 percent monthly decline. The Cleveland Fed supercore services measure, the staff’s preferred tracker of underlying inflation momentum, came in at 3.2 percent on a three-month annualised basis, a touch above the 3.1 percent April reading. The print is a stagflationary energy shock on the surface and a slowly cooling services economy underneath. Markets must read both halves, and so must Warsh.
A Three-Way Committee Split
The committee Warsh inherits is not a Powell committee. April minutes showed a three-way split that has hardened in the six weeks since. Christopher Waller and Stephen Miran, the two doves, want a cut in June to insure against a labor-market break. Patrick Harker, Neel Kashkari, and Lorie Logan, the hawks, want the policy statement to drop the word accommodative and to add a sentence warning that a sustained 4 percent inflation rate is incompatible with the dual mandate. The centre, with Warsh and John Williams, wants to hold rates at 3.50 to 3.75 percent and to defer the cut decision to the September meeting, when the Q2 ECI print on July 31 and the June NFP print on August 7 will have arrived. The June dot plot, under the new chair, is therefore a referendum on the central case, not on the policy statement. Look at the median dot, not at the words.
The Long End Is Now the Trade
Treasury markets are already voting. The two-year yield closed Monday at 3.96 percent, up 22 basis points from a month ago and the highest level since November 2023. The ten-year closed at 4.18 percent, down 5 basis points on the session but up 18 basis points on the month. The two-ten spread bear-flattened to 22 basis points, the tightest since the August 2024 carry-trade unwind. The 30-year reopening auction on June 11 tailed by 3 basis points at 4.84 percent, the highest long-bond yield since 2007. Mortgage rates are now 7.18 percent on a 30-year fixed, and the MBA purchase index has fallen to a three-year low. If the committee reads the curve as it is currently trading, the dot plot will not show a September cut, and the press conference will not invite one.
What the Front Page Is Quietly Saying
The S and P 500 closed at 7,690.20 on Monday, a fresh record, but the breadth is poor. Only 38 percent of constituents are above their 200-day moving average, and the equal-weighted index is up only 2.4 percent year to date, against 14 percent for the cap-weighted index. Gold is at 4,318 an ounce, up 1.6 percent on the session. Bitcoin is above 71,000. The dollar index is at 104.3, the highest since November 2024. Implied volatility on the S and P is 12.4, the lowest of the year. The market is positioning for a hold and a hawkish-leaning dot plot, and the risk is that the dot plot delivers more than the market has priced. A median dot that keeps the year-end rate at 3.75 percent, with three of nineteen participants at 4.00 percent, is the consensus expectation. A median dot that nudges up to 4.00 percent would be the shock.
What to Watch This Week
JOLTS job openings on Tuesday at 10 a.m. Eastern are the first test of whether the labor market is finally cracking. Consensus is 7.2 million, down from 7.4 million in April. A print at or below 7.0 million would give the doves on the committee a fresh data point. The FOMC statement and the new dot plot land Wednesday at 2 p.m. Eastern, with the Warsh press conference at 2:30. Friday brings the University of Michigan consumer sentiment preliminary read for June, with the five-year inflation expectations print the key data point inside it. A print above 3.4 percent on the five-year expectation would harden the hawkish case, and a print below 3.1 percent would soften it. Beyond this week, the catalysts are stacked: the May ECI on July 31, the June NFP on August 7, the Jackson Hole symposium on August 22, and the September FOMC on September 16 to 17. The story of the second half of 2026 is whether the Fed holds the line or folds. Warsh, on Wednesday, gets the first word.