Key Takeaways:
White House economic advisers publicly urged the Federal Reserve to consider looser policy Thursday, hours after the central bank's preferred inflation gauge posted its first monthly decline since 2020.
The Personal Consumption Expenditures price index fell 0.1% in June from May, the Bureau of Economic Analysis reported, the first negative monthly reading since the onset of the pandemic. The headline index rose 3.7% from a year earlier, down from 4.1% in May and below the 3.8% consensus forecast compiled by Dow Jones. Core PCE, which strips out food and energy, increased 0.1% month over month — half the 0.2% economists had expected — and 3.3% annually, matching the prior month's pace.
"The inflation data makes Chair Warsh's job a bit easier," Kevin Hassett, director of the National Economic Council, said in an interview Thursday. Asked whether the White House still had confidence in Warsh, Hassett replied: "Of course." He said he is "very, very bullish on Fed policy going in the right direction, which is a nonpartisan and independent direction."
Separately, White House trade adviser Peter Navarro told reporters the Fed should consider cutting rates if current market trends persist.
The political pressure lands one day after the Federal Open Market Committee held its policy rate at 3.5% to 3.75% for a fifth consecutive meeting — unchanged since the last quarter-point cut in December 2025. The decision was not unanimous: Beth M. Hammack, Neel Kashkari and Lorie K. Logan voted against the hold and preferred a quarter-point hike, a level of dissent against a first-term Fed chair not seen since the 1970s, according to Reuters.
Speaking at his post-meeting press conference Wednesday, Warsh said he is looking at "a broader set of inflation than PCE," signaling that one soft print would not alter the trajectory of monetary policy. Overnight index swap markets currently price a roughly 45% probability of a rate cut at the September FOMC meeting, according to CME FedWatch data.
The cooling inflation data coincided with a weaker-than-expected GDP reading. The economy expanded at a 1.5% annualized rate in the second quarter, below the 1.8% forecast and down from 1.4% in the first quarter. The combination of slowing growth and easing price pressures — a partial "disinflation" scenario — gives dovish FOMC members ammunition heading into September's meeting, though the three dissenting votes for a hike underscore the committee's deep divisions.
"After relentlessly rising for months, the Fed's preferred inflation gauge finally cooled in June as oil prices eased," said Nic Puckrin, macro analyst and founder of Coin Bureau. "That's a glimmer of hope for households that have been crushed by mounting cost-of-living pressures, but it won't be enough to sway the Fed." Puckrin noted that core PCE remains well above the central bank's 2% target and that Middle East tensions could keep oil prices elevated, complicating the inflation outlook.
The last time the Fed faced this level of internal dissent over a rate decision was in 2023, when multiple members pushed for hikes during the tightening cycle. That period preceded a prolonged hold that eventually gave way to the first cuts in late 2024. If the pattern holds, the current dissent — this time from hawks wanting higher rates — could signal a policy pivot is further off than markets expect.
For investors, the standoff between White House pressure for easier policy and the Fed's hawkish internal faction creates a volatile backdrop for fixed-income allocations. The 2-year Treasury yield fell 8 basis points Thursday to 3.92% after the PCE release, while the S&P 500 gained 0.6%. The dollar index slipped 0.3% against a basket of major currencies.
The September FOMC meeting, scheduled for Sept. 15-16, will be the next test of whether the data-dependent Fed can sustain its hold — or whether the combination of cooling inflation, slowing growth and political pressure forces a shift.
This article is for informational purposes only and does not constitute investment advice.
