A critical, closely observed inflation report is scheduled to reveal how significantly price growth accelerated in May, shedding light on whether many American consumers are continuing to struggle under a persistent affordability crunch. Wall Street forecasters have projected that the pace of personal consumption expenditures (PCE)—the Federal Reserve’s preferred inflation metric—has quickened compared to April data, fueled by stronger consumer spending and earlier spikes in oil prices. New Federal Reserve Chairman Kevin Warsh has maintained that the central bank remains steadfast in its mission to guide inflation back to a 2% target, a goal that has remained unmet for the last five years. Wall Street currently anticipates that the Fed will initiate at least one key interest rate hike before the year concludes to combat the recent surge in price growth. By increasing the costs of borrowing, the Federal Reserve intends to dampen broader economic activity and, consequently, decelerate the pace of rising prices.
Rick Gardner, chief investment officer at North Carolina-based RGA Investments, stated that Thursday’s PCE report will carry heightened importance for the markets. He noted that because Chairman Warsh was emphatic during last week’s meeting regarding the bank’s commitment to price stability, the upcoming reading could fundamentally shift market expectations for rate hikes. While interest rates and oil prices typically rise in tandem as twin threats to inflation, their trajectory had briefly begun to decouple before Wednesday. On Wednesday, the correlation appeared to realign as oil prices hit new postwar lows and the yield on the 10-year U.S. Treasury note—a benchmark for borrowing costs across the economy—dipped 9 basis points to a level last seen in April. Amid these developments, Treasury Secretary Scott Bessent expressed confidence that inflation is moving toward a positive outcome. Following his appearance at the Economic Club of New York, Bessent noted his belief that the nation is now on the other side of the recent conflict, and as gas prices decline, inflation will return to target.
As the war with Iran draws to a close and vessels resume transit through the Strait of Hormuz, some analysts are predicting that Chairman Warsh may pursue a more “dovish” strategy aimed at lowering interest rates. President Donald Trump has been clear about his intent to see rates brought down, and leading up to his appointment, Warsh indicated some skepticism toward traditional inflation gauges that have previously supported keeping interest rates at elevated levels. In a recent note to clients, research analysts at Citigroup suggested that Warsh’s move to form “task forces” to re-evaluate the Fed’s approach could result in policies that lean toward a dovish outlook. The analysts noted that the market seems to underestimate the flexibility inherent in appointing these task forces to reconsider the measurements and drivers of inflation.
Separately, stock market gains have displayed signs of stalling after experiencing a nearly unprecedented run during April and May. During those two months, the S&P 500 rallied 16% largely due to gains in the tech sector, despite the Iran war. This level of growth has only occurred once before outside of post-recession rebounds, during the period just a few months prior to the 21% plunge of Black Monday in 1987. Currently, the S&P 500 sits about 4% below its all-time high. While the Federal Reserve’s telegraphing of higher rates contributed to this dip, analysts suggest the market may have simply exhausted its momentum. Henry Allen, a macro strategist at Deutsche Bank, remarked in a note to clients that given such a significant rally which stretched traditional valuation metrics, there was simply not much space for the market to continue climbing. This report coincides with other global news, including twin quakes in Venezuela that have resulted in over 160 deaths, and renewed questions regarding a Wall Street titan’s ties to Epstein.
