The Weekly Wire: “Inflation Is A Choice”

• The updated Fed Dot Plot showed nine of 18 FOMC members now project at least one rate hike by year-end 2026, a sharp reversal from the two rate cuts markets had priced in at the start of the year
• Fed Chair Warsh emphasized that 'inflation is a choice' and acknowledged the Fed's failure to meet its price stability mandate, with PCE inflation running above the 2% target for five consecutive years
• Global equity markets posted strong gains on potential U.S.-Iran peace deal news, with emerging markets up nearly 8% for the week, though oil remains 33% above pre-conflict levels at $77 per barrel

Summary

Federal Reserve Policy Shift

The Federal Reserve held interest rates steady at 3.50%-3.75% but adopted a notably hawkish stance. The updated Dot Plot showed nine of eighteen FOMC members now projecting at least one rate hike by year-end 2026, up from zero in March. Only one member forecasts a rate cut, down from twelve previously. New Fed Chair Kevin Warsh declined to submit projections but emphasized that "Inflation is a choice," establishing his inflation-fighting credentials by acknowledging the Fed's failure to meet its 2% target for five years running.

Market Reaction

Global equities posted strong gains following news of a potential U.S.-Iran peace deal. Emerging markets surged nearly 8%, with developed international and U.S. tech following. Growth stocks outperformed value. Oil retreated to $77 per barrel, still 33% above pre-conflict levels. Fixed income remained essentially flat despite rate uncertainty. The U.S. dollar strengthened 1% to a fresh 52-week high.

Markets now price a 38% probability of a July 29th rate hike, up from near-zero months ago. The Bank of Japan raised rates to their highest level since 1995, marking a historic shift from decades of near-zero rates.

Economic Outlook

The Fed lowered 2026 growth expectations while raising inflation forecasts. PCE inflation is expected above 4% this week. Analysts note that while higher borrowing costs may pressure stocks near-term, an inflation-fighting Fed should support a stronger dollar and lower long-term borrowing costs.

Key Data: Flash PMIs, durable goods orders, new home sales, and consumer sentiment data are scheduled for release this week.