Global Economy & Markets, Weekly Roundup 23/06/26
The shortest Fed statement since 2007 and a renewed emphasis on price stability mark the Warsh era, supporting the US dollar
Regarding equities, the renewed focus on AI monetization prospects -- set against a backdrop of heavy capex -- has partly offset the otherwise supportive environment stemming from easing Middle East tensions and oil prices declining below USD 80/bbl. At the same time, a more vigilant Fed stance on inflation continues to exert some pressure, while the S&P500 excluding the “Magnificent 7” remains close to all-time highs.
In the event, the Federal Reserve (“Fed”) stood pat for a 4th consecutive meeting, as expected, with the Federal Funds Rate (FFR) at a range of 3.50% - 3.75%. The rate decision, as well as the post-meeting statement modification (see below), was unanimous (12 – 0 votes).
Mr. Warsh, in his first meeting as Chair, announced a re-evaluation of a wide array of Fed practices, with respective task forces being formed related to communication, balance sheet, data quality, productivity and inflation frameworks. Importantly, Mr. Warsh is not an advocate of forward guidance, viewing it as an unwarranted influence on financial markets.
In that context, there was no forward guidance (an easing bias had prevailed up to Wednesday), while the commentary of the economy was very tight highlighting (i) growth as expanding at a solid pace with strong productivity growth and capital investment; (ii) labor demand to have kept pace with supply and (iii) inflation to remain elevated partly due to supply shocks. The word-count in the post-meeting Statement was cut to 130 versus 341 in the previous one.
At the same time, Mr. Warsh did not participate in the Federal Open Market Committee (FOMC) economic projections, which also include assumptions for the appropriate path of the policy rate, while also appearing in the Press Conference to downplay them somewhat or at least advise against an over-interpretation of them.
Having said that, 9 out of the 18 FOMC participants (with Chair Warsh not submitting rate projections) now envisage a higher federal funds rate by end 2026, compared to none in the March projection round. That said, the distribution of the end 2026 “dot” may be somewhat less hawkish when considering only the 11 voting members responsible for interest rate decisions in 2026.
Taking also into account an emphasis in the overall post-meeting communique on price stability, 2-Year US government bond yields increased by 12.5 bps to 4.2% with real interest rates leading the increase, while 10-Year yields increased by 2 bps to 4.46%. In all, the curve of investors’ expectations according to FFR futures pricing, moved up by c. +20 bps wow, now pointing to close chances of one or two hikes of +25 bps each by end-2026. The widening in interest rate differentials was significant and supported a broad based appreciation of the USD by 1.2% against the EUR to 1.145.
The “Memorandum of Understanding” (MoU) between the US and Iran was signed in the past week, to serve as a basis for negotiations towards a comprehensive peace deal. On Sunday June 21st, respective delegations agreed on a roadmap for peace talks, initially set to last 60 days. Both Iran and the US have agreed to withdraw all barriers and interruptions of naval flows. Having said that, substantial uncertainties remain, not least because highly contentious and long challenging-to-resolve issues are on the table.
Regarding equities, the renewed focus on AI monetization prospects -- set against a backdrop of heavy capex -- has partly offset the otherwise supportive environment stemming from easing Middle East tensions and oil prices declining below USD 80/bbl. At the same time, a more vigilant Fed stance on inflation continues to exert some pressure, while the S&P500 excluding the “Magnificent 7” remains close to all-time highs.
In the event, the Federal Reserve (“Fed”) stood pat for a 4th consecutive meeting, as expected, with the Federal Funds Rate (FFR) at a range of 3.50% - 3.75%. The rate decision, as well as the post-meeting statement modification (see below), was unanimous (12 – 0 votes).
Mr. Warsh, in his first meeting as Chair, announced a re-evaluation of a wide array of Fed practices, with respective task forces being formed related to communication, balance sheet, data quality, productivity and inflation frameworks. Importantly, Mr. Warsh is not an advocate of forward guidance, viewing it as an unwarranted influence on financial markets.
In that context, there was no forward guidance (an easing bias had prevailed up to Wednesday), while the commentary of the economy was very tight highlighting (i) growth as expanding at a solid pace with strong productivity growth and capital investment; (ii) labor demand to have kept pace with supply and (iii) inflation to remain elevated partly due to supply shocks. The word-count in the post-meeting Statement was cut to 130 versus 341 in the previous one.
At the same time, Mr. Warsh did not participate in the Federal Open Market Committee (FOMC) economic projections, which also include assumptions for the appropriate path of the policy rate, while also appearing in the Press Conference to downplay them somewhat or at least advise against an over-interpretation of them.
Having said that, 9 out of the 18 FOMC participants (with Chair Warsh not submitting rate projections) now envisage a higher federal funds rate by end 2026, compared to none in the March projection round. That said, the distribution of the end 2026 “dot” may be somewhat less hawkish when considering only the 11 voting members responsible for interest rate decisions in 2026.
Taking also into account an emphasis in the overall post-meeting communique on price stability, 2-Year US government bond yields increased by 12.5 bps to 4.2% with real interest rates leading the increase, while 10-Year yields increased by 2 bps to 4.46%. In all, the curve of investors’ expectations according to FFR futures pricing, moved up by c. +20 bps wow, now pointing to close chances of one or two hikes of +25 bps each by end-2026. The widening in interest rate differentials was significant and supported a broad based appreciation of the USD by 1.2% against the EUR to 1.145.
The “Memorandum of Understanding” (MoU) between the US and Iran was signed in the past week, to serve as a basis for negotiations towards a comprehensive peace deal. On Sunday June 21st, respective delegations agreed on a roadmap for peace talks, initially set to last 60 days. Both Iran and the US have agreed to withdraw all barriers and interruptions of naval flows. Having said that, substantial uncertainties remain, not least because highly contentious and long challenging-to-resolve issues are on the table.