Weekly Newsletter: June 22, 2026
Yogi Berra could have been the Federal Reserve Chairman, as he clearly understood the task at hand. “It is difficult to make predictions, especially about the future.” And, “if you don’t know where you are going, you could end up someplace else.” So has been the path of the Fed. Many would argue that for much of the past 25 years, they have been fighting the last battle without much of a plan and wind up in a spot that no one thought possible. Zero interest rates, completely unheard of until the financial crisis, or inflation coming out of Covid. The forward-looking “Summary of Economic Projections” or SEP, is released quarterly by the Fed. It has struggled to get close to the targets that they thought might be achievable over the ensuing year. The new Fed Chair, Kevin Warsh, at his first Fed meeting and subsequent (brief) press conference, laid out a path forward that is likely to be very different than the past quarter century. The forward guidance is likely to disappear as well as the Fed chatter that follows their meetings. The goal is to stop hand-holding the financial markets. Instead of analyzing the data that comes in, investors have been trained to read the data and ask, “What is the Fed going to do with this bit of information?” There has been frustration among economists about the huge revisions to historical data. In an effort to move the Fed into the 21st century, Chair Warsh is laying out a variety of task forces that, by yearend, will have some recommendations on data collection, how best to communicate to the public, what to do with the very large balance sheet, and their approach to inflation. Nothing was said about the jobs market, but a strong message was sent that they are focused on getting inflation down to 2%. The markets hope to observe a lot, just by watching.
The change in tone from the Fed meeting, the terse statement following their meeting, and the short press conference that followed pointed to a very different approach to monetary policy under the Warsh Fed. The reaction in the markets was mixed, as the dollar and bonds took notice that the likely path of interest rates is higher this year. The stock market initially reacted negatively, but then became consumed with the future of AI and gave the Fed little thought the day after the meeting. There was economic data, albeit a few new data points. The one that stood out was retail sales, coming in nearly double the estimates and showing annual growth of 6%, well ahead of inflation. For anyone who may be concerned the consumer is pulling back due to higher energy prices, could be dissuaded by this report. Retail, food services, and drinking places all saw gains. IF the Iran war is indeed over and energy prices can continue to trend lower in the months ahead, the recent inflation report could be the high-water mark for inflation this year.
The bond market reacted quickly to the comments by Chair Warsh following the Fed meeting. Short-term rates rose, while long-term rates fell. The rise in short-term rates is an acknowledgment that the Fed is likely to be raising rates sometime this year. The decrease in long-term rates points to the potential success of reducing inflation. Economic growth continues to spur investors into high yield, pushing the yield difference between treasuries and “junk” bonds to near all-time lows. Does the surprise turn toward higher short-term rates ultimately upset “risk” assets? Maybe. It will depend on how the new monetary policy framework is received by the markets.
The markets continue to be hyper-focused on technology and adjacent companies. Beneath the surface is some erosion in the “other” parts of the markets. The tech and related companies now comprise roughly 50% of the SP500, and as money flows into those stocks, the other parts of the markets have been suffering. Looking at the ten sectors within the SP500, half are trading above their long-term average price, matching the lows of late March, when tech was correcting. Momentum has been waning across the market that has been held up by the index heavyweights. For example, Thursday saw the SP500 rise by just over 1%. Take out the AI-related stocks, the market was down 0.1%. Going back to the beginning of the Iran war, the SP500 is up 8%, and non-AI-related names are up only 1%. What makes that change? A consideration is that the growth of AI is not as profitable as is currently expected.
The economic activity this coming week will have an inflation component to it in the form of the Personal Consumption Expenditures index along with personal income and spending. Continued discussion around the Fed changes is also likely during the week, as a few Fed officials are set to speak.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.