Fed Watch – 6/12/2026

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 June 12 edition of Fed Watch. We’re doing a data dump this week. You might have noticed that last Friday we didn’t talk about that blowout jobs report. That’s because we wanted to get some CPI and PPI numbers this week so we could put everything in context together and then end with some global news about the ECB.

Let’s start by flashing back to last Friday’s May jobs report. We saw a huge headline beat, with 172,000 jobs added. Looking at the breakdown, hospitality led the gains with about 70,000 jobs added, which is an encouraging sign because we like to see employment growth coming from a variety of industries. We also continued to see strong gains in sectors that have been driving job growth recently, including government, which added 55,000 jobs, and healthcare, which added 35,000 jobs. These less macro-correlated sectors remain significant contributors to overall employment growth. The unemployment rate held steady at 4.3%, and we also saw upward revisions to the previous two months of job reports. Overall, this was viewed as another argument for holding rates steady—or potentially even raising them—rather than cutting rates.

Now compare that with the inflation data released this week. We received both CPI and PPI reports. CPI rose 4.2% in May, a very large increase, with much of the rise concentrated in energy prices. However, even core CPI, which excludes the more volatile food and energy categories, increased 2.9%. That tells us inflation is not solely an oil price story. On the producer side, PPI came in at 6.5%, also elevated. While energy played a major role, there are still broader inflationary forces at work. These are fundamental inflation drivers that continue to show up in the data, even if higher energy costs are currently dominating the narrative.

When we put the jobs report and inflation data together, they both point in the same direction with respect to the Fed’s dual mandate. Neither report supports the case for rate cuts. Instead, both strengthen the argument for holding rates steady and potentially considering rate increases down the road. Market sentiment reflects that reality. Going into next week’s Fed meeting, there are nearly 100% odds that rates will remain unchanged. At ITR, we’re very much in that camp as well. No rate change is expected in the near term. However, we’re increasingly focused on the odds for later this year and into next year, and we’re seeing growing signs of life in the rate-increase camp. I’ve been saying for several months that I would not be surprised if the next rate move is up rather than down, and I think the data continues to support that view. Stable labor market conditions combined with increasing price pressures suggest inflation remains persistent. Importantly, this is about more than temporary or transitory factors. It’s not only the war in Iran or broader conflict in the Middle East. We all know the Federal Reserve has been burned by the word “transitory” before, so it’s important to keep these developments in context and focus on the underlying inflation drivers that are unlikely to disappear even if geopolitical tensions ease.

I also want to touch on some global news. This week, the European Central Bank raised interest rates by 25 basis points, its first rate increase since 2023. In explaining that decision, ECB officials explicitly cited the Iran war and the impact of higher oil prices on inflation. Europe tends to be somewhat more exposed to energy costs than the United States, although oil remains a global commodity that affects everyone. Interestingly, the ECB also raised its inflation outlook while lowering its growth forecasts. The ECB now expects overall EU growth of just 0.8% in 2026, rising to 1.2% in 2027 and 1.5% in 2028.

If you follow our ITR forecasts, be sure to review the Trends Report, where you can find our three-year outlook for both Western and Eastern Europe. We segment those regions somewhat differently than the broader Eurozone forecasts, but the general story is one of slower, though still positive, growth. We are expecting more economic malaise in Western Europe next year, so if your business has significant exposure to European markets, watch those developments closely and talk with your ITR economist. We have more granular forecasts available to help with market-by-market planning and exposure analysis.

Overall, the ECB’s 25-basis-point increase represents an effort to get ahead of inflation. Whether it’s enough to meaningfully change the trajectory remains to be seen. Personally, I don’t think 25 basis points is enough to turn the ship around, but it is a move in that direction—and one that I would not be surprised to see the United States eventually follow. As always, we’ll be following the Fed meeting next week and discussing its rate decision—or indecision, as the case may be. Please join us again next week as we unpack all of that news. Until then, I’m Lauren Saidel-Baker. Thank you so much for joining us on Fed Watch.