The economic expansion has advanced from the initial recovery, and the focus is now on metrics the Federal Reserve is looking at to gauge the health of the economy. Since the Fed’s dual mandate is to keep prices stable and maximize employment, we will focus on labor and inflation metrics, keeping in mind the broader economic impact as well. We created a Fed Monitor to track some of the data points that will impact the Fed’s decisions to tighten financial conditions. Additionally, we try to quantify the data and information outside of the dashboard to determine if the Fed is being more dovish than the data, and likely to be more aggressive in the future, or if they are being hawkish relative to the data, and likely to be more conservative in the future.
Minutes from the Federal Reserve’s (Fed) June FOMC meeting indicated that Fed officials are prepared to raise interest rates if inflationary pressures do not moderate this year. Futures markets are currently pricing in an approximately 75% probability of at least one rate hike by year-end and a roughly 50% chance of a hike by the September FOMC meeting. Short-term bond yields have climbed in recent months as expectations for a rate hike have increased.
New Fed Chair Kevin Warsh has provided few signals about the path of rates, but returning inflation to the Fed’s 2.0% target remains a primary objective. During testimony before the House Financial Services Committee, Warsh emphasized that Fed officials have little tolerance for persistently elevated inflation and remain committed to restoring price stability. Public comments from several Fed officials have also highlighted concerns that the rapid expansion of artificial intelligence infrastructure is creating supply constraints for key technological inputs and increased power demand, contributing to near-term inflation pressures. While AI is expected to be disinflationary over the longer term through productivity gains, some policymakers are seeing upside AI inflation risks near-term.
On the economic front, the labor market continues to show signs of stabilization, while core inflationary pressures remain above the Fed’s target. The unemployment rate is at a one-year low of 4.2%, although payroll growth slowed to 57,000 in June, after averaging more than 160,000 over the prior three months. Even so, the U.S. economy added 552,000 jobs during the first half of the year, compared to a loss of 46,000 jobs in the final six months of 2025. Headline CPI inflation declined 0.4% month-over-month (M/M) in June, lowering the year-over-year rate to 3.5%, although much of the slowdown was driven by lower energy prices. The Fed’s preferred inflation gauge is the core PCE price index, which excludes food and energy, and is still elevated at 3.4% Y/Y through May.
Barring a material deceleration in core inflation, the likelihood of a rate hike before year-end is elevated. Although Kevin Warsh is providing less forward guidance than his predecessor Jerome Powell, futures markets and bond yields are signaling higher expectations for tighter monetary policy. We are maintaining the Fed-O-Meter in its current position, reflecting a more hawkish outlook for intertest rate.
