US MACROECONOMIC ANALYSIS

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June 12, 2026 Published: June 11, 2026

The Big Picture

For most of the past two years the story was simple: inflation was falling, the Federal Reserve was cutting interest rates, and the economy was gliding toward a soft landing. That story broke this spring. A war involving Iran in April and May sent oil prices spiking, and inflation — which had been fading — turned back up. Consumer prices rose 4.18% over the year through May, well above the Fed's 2% goal [1]. At the same time, economic growth had already slowed sharply, crawling at just 0.5% in late 2025 before recovering to around 2% early this year [3].

So the economy is doing two uncomfortable things at once: prices are climbing again while growth limps along below its normal pace. That mix has a name economists use sparingly — a stagflationary tilt — and it is not the clean, calm disinflation the automated models were still flashing.

The central tension: financial markets are betting the inflation spike is temporary and the Fed will cut rates twice more this year. The actual data — 4.18% inflation, a newly installed hawkish Fed chair, and a bond market refusing to price any cuts — says otherwise. Our view is that the data wins the next two quarters: inflation stays hot and the Fed stays put, defeating the market's optimistic bet (confidence: moderate-high). This call breaks only if oil settles below about $80 a barrel and the Fed's preferred inflation gauge drops back under 3% by autumn, which would prove the market right and reopen the door to rate cuts [13].

If you remember one thing: the consensus expects rate cuts and cooling prices. We think they get neither.

What the Fed Is Doing and Why It Matters

The Fed's job right now is the hardest one it faces: prices are rising again, but it has already spent a year cutting rates to support a slowing economy. Reversing course is awkward and politically loud. So for now it waits.

Start with where rates are. The Fed has cut its benchmark rate by nearly 2 percentage points from the 2024 peak, bringing it to a range of 3.50–3.75% [5]. That sounds like a lot, but it has unwound only about a third of the steep hikes it delivered to fight the 2022 inflation surge. There's a standard formula economists use to estimate where rates "should" be given inflation and growth — the Taylor Rule — and it currently points to 3.75%, essentially right where the Fed already sits [4]. In other words, policy is roughly where the textbook says it belongs: mildly restrictive, leaning on the economy but not crushing it.

Then came the handover. Kevin Warsh was confirmed as Fed chair in a narrow 54-45 Senate vote in mid-May, replacing Jerome Powell [15,16]. Warsh is known as an inflation hawk, and the bond market reacted immediately. Here's the tell: the 2-year Treasury yield, which tracks where investors think short-term rates are headed, sits at 4.13% — above the Fed's actual 3.62% rate [7,6]. When the market prices future rates higher than today's, it is saying it expects no cuts and possibly hikes. That directly contradicts the automated model still calling for half a point of cuts, a reading that predates the leadership change and that we set aside.

Is the rate medicine working its way through the economy? Partly. After 175 points of cuts, banks are actually tightening the credit they extend to businesses again — a survey shows lending standards stiffening rather than loosening [18]. That usually slows loan growth six to twelve months later, even though business loans are still rising for now [19]. Mortgages, meanwhile, transmit normally, with the 30-year rate around 6.53% [20].

The hardest part for the Fed is that inflation's stickiest core is firm. The Atlanta Fed tracks prices that change infrequently — rent, insurance, services — on the theory that once those move, they stay moved. That measure runs at 3.04% and has been rising [21]. As long as it stays above 3%, the Fed has little room to ease. Our read: the next move is a hold or a hike, not a cut, over the next two quarters (confidence: moderate-high). That changes only if core inflation falls back below 3% and oil keeps sliding.

The Economy Under the Hood

Strip away the headlines and the real question is whether the American consumer — who drives roughly 70% of the economy — can keep spending. The early answer is yes, but the way they're paying for it is the worry.

Start with jobs. May payrolls came in at +172,000, beating the roughly 80,000 economists expected [23]. But the headline flatters the picture. The month before told the real story: April added just 115,000 jobs, and underneath were warning signs — a jump of 358,000 in short-term unemployment and 445,000 more people stuck in part-time work because they couldn't find full-time jobs [22]. Job openings have fallen from their 2025 peak [23], and unemployment has drifted up to 4.3%, about nine-tenths of a percentage point above this cycle's low of 3.4% [8]. The level is fine; the direction is the signal.

Now the catch that ties it all together. Wages are rising about 3.4–3.6% a year, but inflation is running 4.18% [25,1]. That means real wages — your paycheck's actual buying power — have turned negative for the first time since 2022 [26]. Workers are falling behind. And yet spending holds up. How? Consumers are switching from their checking account to their credit card. The savings rate has slipped to 4.5% [29] and consumer borrowing keeps climbing [56]. The spending looks the same on the surface, but the underlying health is very different — and it can't last if paychecks keep losing ground into late 2026.

The freshest sign of demand is housing, and it surprised to the upside. Two separate reports put May existing-home sales up 3.2% from April to an annual pace of 4.17 million — the fastest this year — even with mortgage rates above 6.5% [10]. Buyers showed up despite expensive money, a notable bit of resilience. Building permits are rising too, which tends to signal construction activity six to nine months out [34]. Other corners are losing ground: factory orders for big-ticket durable goods have fallen three months running [33], and industrial production data is months stale.

The bottom line on growth: it's holding below its long-run potential of about 2%, not accelerating the way the automated momentum model — built on only 30% of its usual data — implies. Our view: growth runs somewhere around 1.9–2.5% over the next two quarters (confidence: moderate). The one thing that breaks it is the consumer — if spending turns negative or hiring drops below roughly 100,000 a month, the floor gives way.

What Could Go Wrong (and Right)

Wall Street is calm. Main Street is softening. That gap is the heart of the risk picture.

By every market gauge, conditions look easy. The extra interest that risky companies pay to borrow above safe government bonds — the credit spread — sits at just 2.80%, well inside its normal range, meaning lenders see almost no danger of defaults [11]. The stock market's fear gauge — the VIX, which measures how much turbulence investors expect — reads 19.44, squarely normal [41]. Broad measures of financial conditions show credit flowing freely [42]. If a recession were brewing, these would be flashing red. They aren't.

But two signals cut against the calm. First, the yield curve — the gap between long-term and short-term government bond rates — has flipped back to normal after being upside-down for two years. Historically, that re-normalization tends to come right before a recession, not after. The catch this time is that it's the wrong kind of normalization: long-term rates are rising on inflation fears, not short-term rates falling on cut hopes, which dilutes the warning [38]. Second, and louder, is gold near a record $4,225 [44]. Record gold alongside calm credit markets describes investors hedging against inflation and government debt — not against a recession.

Here is how the next year could break down:

The math behind these starts from the leading indicators, which lean clearly toward growth — six of eight point up. From that hopeful base, we shift the odds for the live risks: the energy shock pulls a chunk of probability out of the calm "slow but steady" outcome and into "worst of both worlds," while the better-than-expected May hiring and the housing rebound knock down the recession odds. Add it up and the two inflation-driven outcomes — second wind plus worst-of-both-worlds — total 46%. That makes "higher inflation and a hawkish Fed" the single most likely risk, more probable than recession at just 10%. Oil is the swing factor across every path: a sustained spike tips toward stagflation or recession; a drop below $80 reopens the clean soft landing.

What this means for where to put money. This environment historically rewards owning gold and other real assets, which thrive when inflation runs hot and governments run deficits — gold near a record, a weaker dollar, and calm credit all confirm the pattern [44]. The risk that flips it: a decisive oil drop below $80 plus cooling core inflation would deflate the whole reflation trade and reward bonds instead. Longer-term government bonds, by contrast, tend to lose value here, because a hawkish Fed and a rising "term premium" on a roughly $2 trillion deficit push long rates up [50] — unless a recession arrives (10% odds) or oil collapses, in which case those same bonds rally hard. Corporate bonds offer little cushion at today's tight spreads, so quality beats yield. Stocks are a coin flip: full valuations near 20 times earnings leave little margin if the Fed turns hawkish, though a second wind would lift them.

What to watch, in plain terms: if the Fed's core inflation gauge stays above 3% on the late-June reading, the no-cut path is sealed. If oil holds below $80, the opposite. And the most reliable recession alarm — the Sahm Rule, which trips when unemployment rises fast — sits at just 0.10, far below its 0.50 trigger [48]. If it climbs past 0.50, history since 1970 says a recession is already underway.

The Leading Indicators

The most forward-looking signals — the ones that move before the economy does — still point toward growth, even with inflation clouding the picture.

Of the eight leading indicators, six say the expansion holds together and two flag caution — a growth-dominant scoreboard. And both cautionary signals are weaker than they look: the yield curve warning is the diluted kind described above, and the bank-lending tightening is a slow-burn channel that hasn't yet dented actual loan volumes.

The real-time check agrees. The lagging indicators that confirm rather than predict — credit-card and auto-loan delinquencies, business lending, inventories — all deny a recession. Delinquencies are falling [54,55], loans are still growing [19], and there's no inventory glut [57]. Piecing the demand-side data together implies growth around 2.0–2.6%, matching the model's 2.58% estimate. The scoreboard and the inflation overlay aren't contradictory — together they describe an economy still expanding straight into a price shock. That, in a phrase, is the stagflationary tilt.

Sources

Sources reference the FRED economic database maintained by the Federal Reserve Bank of St. Louis, news reporting, and quantitative model outputs.

Fed Policy & Rates [5] FRED, DFEDTARU / DFEDTARL, 2026-06-11, 3.75% / 3.50% [6] FRED, DFF, 2026-06-09, 3.62% [7] FRED, DGS2, 2026-06-10, 4.13% [9] FRED, DGS10, 2026-06-10, 4.55% [38] FRED, DGS30, 2026-06-05, 5.01% [50] FRED, DGS30 / fiscal term-premium reference, 2026-06-05, 5.01%

Labor Market [8] CNBC, May payrolls +172K, unemployment 4.3%, 2026-06-05 [22] BLS / CNBC, April payrolls +115K with red flags — short-term unemployment and part-time-for-economic-reasons rising, 2026-05-08 [23] CNBC, JOLTS openings falling from September peak; labor demand cooling, 2026-06-05 [25] FRED, CES0500000003, 2026-03-01, $37.38 [48] FRED, SAHMREALTIME, 2026-05-01, 0.10 [51] FRED, IC4WSA, 2026-04-18, 210,750

Inflation & Prices [1] FRED, CPIAUCSL / CPILFESL, 2026-05-01, +4.18% / +2.84% YoY [13] Al Jazeera, US-China comparison — US average tariff on China imports ~31.6%, 2026-05-13 [21] FRED, CORESTICKM159SFRBATL, 2026-04-01, 3.04% [26] Economic Times, US real wages turn negative for first time since 2022 as inflation outpaces pay, 2026-05-12

Growth & Output [3] CNBC, BEA third estimate — Q4 2025 real GDP revised to +0.5% annualized; Q1 2026 ~2% annualized, 2026-04-30 [33] FRED, DGORDER, 2026-02-01, 315501 (falling 3 months) [34] FRED, PERMIT / NEWORDER, 2026-04-01, 1423K permits

Housing [10] ABC News/AP, May existing home sales +3.2% MoM to 4.17M SAAR, fastest pace this year, 2026-06-11 [20] FRED, MORTGAGE30US, 2026-05-28, 6.53%

Credit & Banking [11] FRED, BAMLH0A0HYM2, 2026-06-10, 2.80% [18] FRED, DRTSCILM, 2026-04-01, 8.1% [19] FRED, BUSLOANS, 2026-03-01, +1.36% [54] FRED, DRCCLACBS (credit-card delinquency), 2025-07-01, 2.98% [55] FRED, DRCLACBS (auto-loan delinquency), 2025-07-01, 2.72% [56] FRED, CONSUMER, 2026-03-01, +0.75%

Financial Conditions & Markets [41] FRED, VIXCLS, 2026-06-11, 19.44 [42] FRED, NFCI, 2026-04-03, −0.433 [44] Yahoo Finance, Gold spot, 2026-06-11, ~$4,225 (+2.85% MoM) [52] FRED, WEI, 2026-05-23, 3.02 [53] FRED, M2REAL, 2026-02-01 (rising 5 months), 6,922.2

Consumer & Sentiment [29] FRED, PSAVERT, 2026-01-01, 4.5%

Fed Leadership & Policy News [15] CNBC, Kevin Warsh wins Senate confirmation as the next Federal Reserve chair, 54-45 vote, 2026-05-13 [16] CNN, Powell finishes his term as Fed chair; Warsh transition, 2026-05-15

Other [4] CNBC, April 2026 CPI breakdown — energy-driven, Iran-war oil shock, 2026-05-12 [57] FRED, ISRATIO, 2025-11-01, 1.37