Top of the Morning: June FOMC meeting recap & macro update

Hi everyone. Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel.

For today's conversation, a timely one as we will spend some time recapping this week's FOMC meeting as well as the press conference. Joining me for the conversation today from the UBS Chief Investment Office, glad to welcome back Senior U.S. Economist Andrew Dubinsky.

Andrew, good morning to you and thank you for joining us. I know this week we did see that Kevin Warsh led his first FOMC meeting as Fed Chairman. So at the start here, I'm curious as to what the takeaways are from your standpoint from the statement as well as his press conference.

Yes, it's been quite a week and the first Warsh meeting was a fairly hawkish one and much more hawkish than the expectations, which were that we would have a number of hawkish revisions. And there's a number of dimensions from this meeting because it's not just a meeting with a statement and a rate decision. And we did get a press conference, which wasn't a given, given his preferences.

And we also got new forecast. And it really got, I think, a broad message that there is definitely no easing bias in the near to medium term, no interest in giving forward guidance. And there's going to be certainly a lot, there was a lot of focus on inflation in the statement and in the press conference.

The statement was obviously overhauled and removed the easing bias. It did show a unanimous agreement to leave rates on hold. But there was a bit of a bit more focus on inflation than the employment mandate.

And so that was one, just another way where the meeting gave a very hawkish tone. And then the, I think the forecast were probably a key factor in the market reaction where you saw two year yields increase pretty moderately. And we, what happened there is the dot distribution, the rate projections showed nine participants.

So that's nine out of 19 projecting hikes in 2026. And the median rate projection doesn't show any cuts from current levels until 2028. So that's a change from March where we had cuts implied in 2026 and very only one person projecting hikes.

So one to nine. And if you have to motivate, why did they do that? The inflation forecast moved significantly higher for the current year and even a bit for the next year.

So there, the forecast show that the Fed doesn't expect much inflation progress for the second half of the year. Now, when we get to the press conference, one thing that was interesting is that Warsh did say that he did not contribute a dot. So there were only 18 and one year, only 17 dots.

So he did not contribute a dot. And he suggested that the dots were written in with pencil and with big erasers. And he just downplayed the conviction of those projections.

So I think it's just another, another way to put it is I wouldn't take those projections literally. But if inflation surprises, it definitely shows the risk of a hike would increase. And I think the other thing to note is he announced five task forces.

They're going to cover things along the lines of communication, the balance sheet outlook and some other topics. And he expects them to conclude or reach their conclusions by the end of the year. Why do I mention that?

I think that these changes, these task forces likely slow down any near-term changes. So we have a pretty hawkish message from these forecasts. But I think these committees suggest that there's going to be some debate and discussion before there's any near-term action for 2026.

The bottom line is fairly divided committee, a lot of potential changes to the framework at the Fed in terms of communication, possibly balance sheet changes, but nothing really, no immediate changes. Okay. So a lot there to digest.

And Andrew, with that assessment now in mind, what is CIO's outlook for monetary policy through the balance of 2026 as we're recording here on June 18th? Yeah. So we're not expecting any changes to policy in 2026.

So we would fade the market pricing of hikes in 2026. Why is that? Well, we expect more inflation progress this year than the Fed.

We're expecting a bit more second half disinflation. That's core PC inflation, which is tracking right around 3.4 percent, could edge down a few tenths by the end of the year. And we think that the improvements in the Middle East conflict could reduce some of the hawkishness as some of supply bottleneck concerns fade.

So we do think that some of the hawkishness today reflects some forecasts that where we have somewhat a different view. And we also think there's some, maybe even some recent news that the Fed didn't incorporate in the forecast. So we're expecting the Fed to remain in a wait and see mode with no cuts until 2027 as we get more disinflation progress.

Now, Andrew, as we continue to gauge the health of the U.S. economy near term, what are some macro data points of interest on your radar? Yeah. So first, I'll look back because I think the retail sales report probably overshadowed by the Fed.

And that showed that control group sales were a seven tenths and fairly broad strength. And that contributes to pretty strong tracking for second quarter growth of around, let's say, two and a half to three percent on some measures. So it definitely seems like we're getting a lot of support from tax refunds through May and recent stock market gains.

And so as we get to next week, we're going to get more spending data. We're going to get the rest of May spending, along with the Fed's preferred inflation gauge, the Corp ECE data. Now, we know from the inflation data and some other inputs to Corp ECE that it's probably going to edge higher to 3.4 percent.

We also will learn a little bit more about the details, but there's probably a one tenth or so contribution that's directly linked to the stock market appreciation through financial services. So some of this uptick in inflation now would discount as different than regular, traditional, persistent demand side inflation. In addition to the spending and inflation data, we're going to get these new business surveys for June, along with some other capital spending data, business spending data.

And I think the thing we're going to be looking at closely in those business surveys data, business survey data, is they have, the PMIs have price indices and they also have supply delivery time measures, which we'll call like supply bottleneck measures. And given the high rate, you know, the high concerns over inflation and elevated inflation, we think these will be pretty timely indicators for what's already, you know, what's happening in June. And do we see some signs of progress in June or do things look like they're staying hot?

Well, with that, Andrew, very timely, insightful conversation this morning. Thank you for dropping by top of the morning to keep our listeners, our clients informed. A very helpful recap of this week's FOMC meeting.

Helpful to have a sense for CIO's outlook for monetary policy and what's on your radar in terms of macro data points of interest. So thank you again for joining us today, Andrew. Appreciate it.

Oh, it's been my pleasure. I always love it. Thank you, Andrew.

Again, today we've been joined by senior U.S. economist from the UBS Chief Investment Office, Andrew Dubinsky. On a related note, Andrew did author a blog on this very topic, recapping the June FOMC meeting. The title is A Hawkish Start for the Warsh Regime.

This blog is now available up on UBS.com slash CIO. Though for clients of UBS, you may, of course, reach out to your UBS financial advisor to receive a copy of Andrew's June FOMC meeting recap blog directly. From UBS Studios, I'm Dan Cassidy.

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