Fed Watch – 5/15/2026

The below transcript is a literal translation of the podcast audio that has been machine generated by Adobe Podcast.

Hi, I’m Lauren Saidel-Baker and thank you so much for joining us for this May 15th edition of Fed Watch.

It has been a big week in Fed Watcher world. Clearly Kevin Warsh taking over as chair of the Fed is the major headline news. We’re going to talk about that in just a moment. But I want to start with some of the data that was released this week. We had both CPI and PPI numbers. So a new read on inflation for the month of April. And these numbers across the board came in higher than expected. Now we had been expecting some boost especially from energy prices with oil being so high with that conflict in Iran. But I want to go to some of those numbers. The big one that you’ve seen is the PPI number, up 6% annually in April. I believe it was about 5.2% on a core basis. That is a big number, any way you slice it, 6% is elevated. And normally this is the time in the episode where I would say that one month of data does not make a trend, so we should all calm down a little bit. But I also want to point out that this elevated read in April, it comes on the heels of relatively hot PPI inflation in both February and March.

So this is now a three month long trend of monthly values higher than their normal seasonal range. And beyond that, this inflation, it was spread both across the goods and the services side of the equation. So this is much more broad based. We have been talking for quarters if not years now about these broader inflationary impacts. It’s not just tariffs. It’s not just oil prices. There are very pervasive factors throughout the economy that are causing that upside pressure on pricing. So while this 6% in April will probably see some normalization again, we do expect to see oil prices normalize in the second half of this year. Please keep in mind this is not the only thing affecting pricing. If you’re coming at this from a margin point of view, I think businesses should take this headline and start to look at their own data. We have this term here at ITR Economics, profitless prosperity. Are you watching your margins or are you just focused on the top line? This is going to take a lot of cost discipline and a lot of awareness about that spread between your own input costs and what pricing power you have.

Let’s turn to the other side of that equation, on that note, which is the CPI that also came in a little hot for April. This was up 3.8% on an annual basis in April. Core value 2.8%. Again, both of those figures significantly higher than the Fed’s 2% target for inflation. Clearly, they’re looking at the PCE data, which will take more time to come in. But this as a quick view as our initial view of what inflation did in April, it’s giving policymakers reason for pause.

So on the heels of that, with Warsh’s confirmation, finally he will be the next Fed chair   coming in. This is an individual who has in the past argued for more dovish policy. We always want to remind our viewers that even as the Fed chair, he’s only one individual on the voting committee. He cannot single handedly determine where interest rate policy goes. However, his job is going to be to build consensus across the members of that voting committee. So coming in with a slightly more dovish tilt and seeing this committee increasingly divergent in their views of where rates need to be. In the past couple of weeks, we’ve had an increasing number of Fed governors argue that rates need to go up, not down, to combat this inflation. No one on the Fed committee wants to see inflation get out of hand. So for Warsh, this is going to be something of a tightrope walk. He has a very careful, very intentional balancing act that he will need to do from the political side, from those academic pressures, arguing maybe for more dovish policy against this elevated inflationary environment.

Clearly, we’ll be watching this inflation as it comes in in the future. And at this point, the market expectation is really turning more in line with what we at ITR have been saying, that the next rate change will more likely be a rate hike rather than a rate cut. We have been on record, we’ll have to go back and see for how long now, but several quarters talking about the end of 2026 potentially being the time when we start to talk about rates increasing from this new baseline. Market expectations are generally getting more and more on board. If you look at some of the Fed rate odds at the moment. Our base case view, to be absolutely clear, is for rates to hold for the near term, I don’t expect significant change. So what that means for your business, if you need to do any borrowing, now is probably the best time that you will see.

Please evaluate what investment needs you need to make, especially in the wake of that margin discussion. If there is capital investment that you can put into place now, that will make you more productive, that will allow you to avoid that profitless prosperity trap, please evaluate at this cost of borrowing if that is something worth doing for your business. And of course, if we can help you with those discussions, please reach out to an economist here at ITR Economics, we are more than happy to have that conversation. All of this in the context of some tough inflation news, but we’ll keep bringing it to you right here on Fed Watch.