Baker Market Update 2026-06-26

It has now been one week since Kevin Warsh chaired his first FOMC meeting as Chairman of the Federal Reserve Board. In the days since, the statement, the Summary of Economic Projections (SEP), and this week's economic data have flattened the US Treasury yield curve and driven domestic equity indexes lower. This week's data echoed many of the same things the committee covered in their statement, namely an expanding economy and elevated price levels above their 2% target. The focus has now shifted toward the fight against inflation.

Tuesday the 23rd, S&P released their Global US Manufacturing PMI, which, as to no surprise per the FOMC's statement last week, was in expansionary territory and came in hotter than analyst expectations as well as prior values. Yesterday, another slate of data hit the tape for market participants to digest. Core PCE Price Index on both a QoQ and YoY basis came in line with expectations, but meaningfully higher than prior values. The third estimate of first quarter GDP on an annualized basis was released by the Bureau of Economic Analysis, coming in 0.5% higher than analyst expectations, with an actual value of 2.1% vs expectations of 1.6%. Personal income and personal spending showed the same trend, coming in above expectations as well as prior values. With the FOMC statement and a full slate of data all pointing in the same direction, a healthy economy positioned for continued growth, why did markets respond with a flatter curve and a selloff in domestic equities (growth names in particular)? The phrase "the bond market doesn't lie" is a popular saying among participants and may be the telltale sign regarding this week's movements in the market.

Looking at last week's SEP against the prior two releases (March 2026 and December 2025), a few shifts stand out. As to no surprise, the projected federal funds rate moved 40bps higher across the next three years, but over that same horizon both the median and lower bound of real GDP shifted noticeably lower, with the lower bound dropping below the 2% long-run target for the first time. Not to mention the range widened, with the upper bound seeing no increase. The read here is a more hawkish Fed, and the memory of 2021 is hard to ignore, when inflation was dismissed as "transitory," and the delayed response ultimately forced 500bps of hikes inside a year that dented policymakers' credibility, leaving what some would describe as a scar. Now that inflation risks are creeping up again, the projected rate path mirrors a committee determined not to repeat that mistake, and the market appears to be repricing both short term and long term inflation expectations lower, which can be inferred by the flattening of the yield curve. However, there is a notable difference between the economic backdrop that prompted the aggressive rate hikes of the last cycle and the one we face today. That distinction may be creating uncertainty around how the economy would respond if the Fed were to mirror its prior playbook proactively under current conditions.

Next week we take a deep dive into the state of the job market, with Nonfarm Payrolls, ADP Employment Change, and the Unemployment Rate are set to be released. Have a great weekend everyone!