Fed Gets Clean Start With Warsh, Retail Sales Shine, Sarge’s Secrets

Markets didn’t like what they heard. Then they did. The intense selling pressure began in earnest on Wednesday afternoon just after the Federal Open Market Committee policy statement and updated FOMC economic projections hit publication. What was visible before us was not shocking but did appear to be more hawkish than anyone really expected. The S&P 500 gave up 91 points, or 1.21%. The Nasdaq Composite was hit for a loss of 354 points or 1.34%. Treasury debt securities were hit as well.

By late afternoon, the U.S. Ten-Year Note paid as much as 4.5%, up from 4.43% at the time of publication. The move was even more exaggerated for the U.S. Two-Year Note. That yield ran as high as 4.22% late Wednesday after only paying 4.06% at 2 p.m. ET. Apparently, Fed Chair Kevin Warsh’s new look Federal Reserve had not made a good first impression on the investing public. Or had he / they?

With an assist from Pres. Trump having signed the peace deal with Iran himself last night in France and perhaps some re-consideration among investors and traders, U.S. equity index futures are absolutely soaring overnight. I write early, so the situation could still change dramatically, but at zero-dark thirty, when factoring in fair value, U.S. futures are up considerably more right now than the indexes themselves were down on Wednesday.

The New Fed

The new Fed Chair used his first policy meeting to change up a few things at our nation’s central bank. Most noticeably, Warsh trimmed down the official statement to little more than bullet points. Gone are the paragraphs meant to steer forward guidance. The new statement is divided into four mini sections.

First, the vote is announced, which in this case, was unanimous. Second, came the outcome of the meeting. On Wednesday, the target range for the Fed Funds Rate was expectedly left at 3.5% to 3.75% while the central bank reaffirmed its intention to maintain ample reserves across the banking system. Third, the health of the economy is briefly addressed and lastly, the statement touches on the current state of inflation relative to the Fed’s stated goal with a pledge to deliver price stability.

It was perhaps that last sentence… “The Committee will deliver price stability” that rattled Wall Street’s algorithms. No mention of full employment. Does that mean that the Fed will tackle inflation at the cost of healthy labor markets? Some on Wall Street did take this last sentence in that way.

There’s More…

Then we get to the economic projections and the dot plot. It is key to remember that Warsh has downplayed and continues to downplay the importance of the dot plot as a tool of forward guidance. In fact, he “likes” the dot plot so much that he chose not to participate. Across the voting and non-voting membership of the FOMC, there are 19 individuals who are considered members of the “Committee.” There were only 18 dots.

As recently as March, 11 of those dots, which are meant to project the Fed Funds Rate at year’s end, were entered below 3.5% implying at least a minimal rate cut. No dots were above 3.75%, meaning that none of the 19 members at that time saw raising short-term rates in 2026 as a possibility.

In the dot plot released on Wednesday, only one dot remains in “rate cut” territory. That dot is believed to be Fed Gov. Michelle Bowman. Eight dots see rates remaining where they are now. Nine dots are now above 3.75%, implying at least one minimum rate increase by December. Of course, there was one abstention. That was Warsh himself. If the last sentence of the statement hadn’t shaken the street, the movement of these dots sure did.

Looking over the FOMC’s median expectations for year-end 2026 across key economic metrics, the committee now sees headline inflation at 3.6%, up from 2.7%, core inflation at 3.3%, up from 2.7% and unemployment at 4.3%, down from 4.4%. Economic activity, as illustrated by GDP, is now seen at growth of 2.2%, down from 2.4%.

Under that scenario, it’s logical to see why academic economists with little real-world experience would look to tackle inflation. Those of us who have actually left the castle and worked among the people know that the peace deal with Iran, like it or not (dependent upon one’s political leanings), will bring inflation down rapidly.

We also know that raising short-term rates will damage small business health, slow economic activity and weaken labor market demand. So, let’s keep our heads about us, shall we? These PhD. economists can be like petulant teenagers. Think they know everything without ever having run anything or hired anyone.

I Am a Fan of…

• Warsh’s intention to cut back on forward guidance. This guidance has really been accurate in the past.
• Warsh’s intention to create task forces that will focus on various issues to be dealt with by the central bank whereas monetary policy is concerned.
• Warsh’s willingness to move beyond traditional economic metrics as sources of data. There is no reason in the world why, when “big brother” always knows what we do and where we are, that our policymakers rely upon so many inaccurate surveys and not hard data. There is no good reason in the world, why we get three different numbers for job creation every month and why those numbers are so significantly “seasoned” when we get them.
• Warsh’s intention to take a new approach towards balance sheet management. We need more detail on this, but acknowledging the problem is a good first step.

Retail Sales

As seen with labor markets over the past three months, reports of the economic slowdown facing the U.S. had been greatly exaggerated. On Wednesday morning, the Census Bureau reported retail sales for May. For the fourth consecutive month, U.S. consumers posted impressive numbers. At the headline level, retail sales grew 0.9% on a month-over-month basis vs. expectations for growth of 0.5%. At the core (ex-autos), sales were up 0.8% vs. expectations for growth of 0.6%.

Of course, gasoline prices pushed retail sales higher, but sales, ex-gasoline, were still up 0.7%. Impressive. What grew above trend? Furniture, auto parts and internet sales, which could be anything. What grew with the economy? Personal care, clothing and the fun (sporting goods, books, music, hobbies) index. What dragged on results? Building materials (that could be a problem), and groceries (hmm?).

Yes….

Wednesday ended up being a “Day One” Bearish Reversal of Trend on the charts. Seeing if the regular session on Thursday can sustain this overnight rally will reflect professional opinion and quite possibly be the key to the next month or so of trading, until earnings season kicks off in mid-July and Kevin Warsh steps back up to the plate on July 29.

Sarge’s Corner…

Trying not to sound arrogant, my belief is that what follows is why I have been able to go for as long as I have without the need for an employer. Yes, it’s a lot of work. That said, leaving Wall Street voluntarily for good now more than 10 years ago and not having to answer to morons is its own reward.

I never expected to have some of my best years after heading out on my own and trading only my family’s money, but here we are. Discipline and a “tried and true” method have been my keys to success.

Trading

Disciplinary components that improve the probability for success across all positions for those taking a serious approach….

• Target Price (required)
• Pivot (sure helps)
• Add Levels (encouraged)
• Panic Points (required)

Note: Risk management beats stock picking more often than not.

Investing

What your author likes to see when setting up an investment….

• Economic story makes sense through the prism of policy.
• Fundamental story supports the idea of multiple expansion.
• Technical story supports either trend continuance or trend reversal.

Economics (All Times Eastern)

08:30 – Initial Jobless Claims (Weekly): Expecting 227K, Last 229K.

08:30 – Continuing Claims (Weekly): Last 1.795M.

08:30 – Philadelphia Fed Manufacturing Index (June): Expecting 10.7, Last -0.4.

10:00 – CB Leading Indicators (May): Expecting 0.1% m/m, Last 0.1% m/m.

10:30 – Natural Gas Inventories (Weekly): Last +108B cf.

1:00 p.m. – Baker Hughes Total Rig Count (Weekly): Last 562.

1:00 – Baker Hughes Oil Rig Count (Weekly): Last 433.

4:00 – Net Long-Term TIC Flows (Apr): Last $81.3B.

The Fed (All Times Eastern)

No public appearances scheduled.

Today’s Earnings Highlights (Consensus EPS Expectations)

Before the Open: ACN (3.71), KR (1.59)

At the time of publication, Guilfoyle had no position in any security mentioned.