Roar
Katy Perry does it all. She opened the 2026 FIFA World Cup, co-hosts American Idol, dabbles in Canadian diplomacy, and still has time to dip her toe in economic waters. In “Roar,” Perry sings: “I used to bite my tongue and hold my breath, scared to rock the boat and make a mess. So, I sat quietly, agreed politely.” Later in the song, however, she exclaims that she has moved past those feelings, and that we’re going to hear her roar.
The same can be said of Kevin Warsh and some other members of the Federal Open Market Committee (FOMC). While policymakers held rates steady last week, they also signaled that they may be willing to increase the federal funds rate as early as this year.
“Persistently high prices are a burden for the American people, but the recent past need not be prologue,” Warsh said in his debut press conference as Federal Reserve Chair. Officials “are unambiguous and unanimous. This committee will deliver price stability.” Warsh’s words seemed to be a hawkish warning that inflation has lingered above target for too long (Figure 1).
Indeed, the May reading of the Bureau of Labor Statistics’ CPI report suggested a monthly advance in prices of 0.5%, bringing the annual figure to 4.2% and the core figure to 2.9%. (The difference between the two is due to the recent runup in energy costs.) The FOMC’s target is 2.0%.
Warsh arrived at the Fed last month promising “regime change.” In his opening remarks, he announced the creation of multiple task forces to examine five areas that he thinks could use fresh perspective: communications, the balance sheet, the Fed’s “use and reliance on existing data sources,” productivity and jobs, and the central bank’s “inflation frameworks.” The task forces will include outside experts, Warsh said, and be supported by Fed staff.
Some Fed watchers expected Warsh to come to the central bank with a dovish frame of mind, regardless of the data. Yet last week’s meeting suggested otherwise.
As expected, policymakers removed the easing bias that had accompanied the FOMC’s post-meeting statements for some time; policymakers also projected a rate hike in 2026 (Figure 2). This wasn’t a total surprise, as noted in last week’s Talking Points. “The Federal Reserve’s decision to hold interest rates steady came with a hawkish tilt,” observed Bob Michele of JPMorgan Asset Management. “With policymakers signaling they are preparing markets for the possibility of higher borrowing costs.”
In his press conference, Warsh also mentioned that he did not submit his own dot because he’s not a fan of the dot plot chart: In Warsh’s view, the chart is an example of the current Fed’s tendency to get its forecasts wrong, to overcommunicate, and to blunt market signals, as investors react not to new economic data but to how they expect the Fed to react to that data.
The dot plot chart debuted in November 2007 in the shadow of the Great Financial Crisis. It evolved over time, with forecasts included beginning in 2012. Now, however, the chart’s days may be numbered.
Warsh also signaled that his holding of future press conferences may not be automatic, as has become customary in recent decades. “When you have [a press conference] you want to make sure you have something important to say,” he explained. Beyond the hawkish tone of the meeting, it seems that the makeup of the FOMC is also getting heavier on the hawkish side (Figure 3).
We’ve heard of the roaring 1920s—a period of economic prosperity, technological breakthroughs, and rapid social change. It feels like those characteristics could easily describe today’s narrative as well. While inflation may be roaring back, the Fed, like Perry, seems to have ample willingness to fight back.
FROM THE DESK
Agency CMBS — Fannie DUS spreads were flat to one basis point wider last week, as supply picked up. Ginnie Mae spreads were two to three bps wider last week and felt like they would have widened more if supply was heavier.
Municipals — AAA tax-exempt yields moved modestly lower across the curve week-over-week, as the market took a breather with lighter primary issuance amid the holiday-shortened week. Despite higher Treasury yields following last week’s Fed meeting, municipals held firm, supported by ongoing positive fund flows and reinvestment demand. This relative stability further richened short-end ratios, with the tax-exempt to taxable ratio tightening to 57%, compared to 87% on the long end. Fund flows remained constructive at $1.19 billion, though high yield demand was more muted, with $453 million inflows.
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