Inflation isn't as high as you think - and Fed Chair Kevin Warsh looks less hawkish than advertised
Real estate and other rate-sensitive sectors should get a boost if the Federal Reserve holds interest rates steady.
The rate-hike camp will be proven wrong.
U.S. inflation may not be as high as you think. That may sound ridiculous to anyone who's grappled with rising prices for groceries, rent, healthcare and other essentials. The loss in purchasing power from inflation has been real, and painful. And just as inflation appeared to be coming under control, consumers and investors had to contend with new shocks from trade tariffs and, later, the U.S.-Iran war and a surge in gasoline prices.
That is a reason many economic forecasters, including Bank of America, are now calling for as many as three interest-rate hikes in 2026. The consensus currently is leaning toward 0.25% (25-basis-point) rate increases from the Federal Reserve in September, October and December.
The rate-hike camp will be proven wrong. Recent inflation data suggest the era of rapid price acceleration may be ending, not reaccelerating.
The bond market appears to agree. The latest personal consumption expenditures report showed core inflation ticking up to its highest level since 2023. On the surface, that sounds like a clear warning sign for investors who see a dovish Fed in the future. But following the PCE report, the 2-year Treasury yield BX:TMUBMUSD02Y declined. That matters because the 2-year yield is one of the best real-time gauges of where the market thinks the federal-funds rate is headed.
In other words, investors looked at the same "hot" inflation report and concluded not that more hikes are coming, but that the worst inflation fears may already be priced in.
And that brings us to the new chair of the Federal Reserve, Kevin Warsh.
The inflation measure that matters
Kevin Warsh may not be looking at the same inflation scoreboard as everyone else.
As I discussed in a recent Substack newsletter, Warsh may not be looking at the same inflation scoreboard as everyone else.
Most investors hear "hot PCE" and assume that means more rate hikes are coming. But Warsh signaled at his Senate confirmation hearing last spring that he favors the Dallas Fed's "trimmed mean" PCE over the standard core PCE measure. That distinction matters a lot.
Core PCE strips out food and energy, but it can still be skewed by a handful of unusually large price moves. The trimmed-mean PCE goes a step further by cutting out the most extreme monthly moves on both ends. In other words, it is designed to give policymakers a cleaner read on underlying inflation.
And right now, that cleaner read looks a lot cooler.
Trimmed-mean PCE is running materially below core PCE - at 2.4%, versus 4.1% for core PCE - which means the U.S. inflation picture looks less alarming depending on which measure you care about. That is one reason investors may be overestimating how hawkish Warsh will be on rates.
Warsh may be more of a dove on rates than he appears at first glance. He may still want a stronger U.S. dollar DXY and a smaller Fed balance sheet, but that is quite different from launching a full-blown hiking cycle.
Investors are misreading the Fed
Other voting members of the Federal Reserve board agree. New York Fed President John Williams said he "expects inflation to edge down" in coming quarters, noting that current monetary policy is well-positioned to accomplish that.
Williams was echoed by St. Louis Fed President Christopher Waller. In a speech last month, Waller said he was "prepared to be patient in holding policy at its current restrictive setting." At the time, the price of crude oil (CL00) - a main driver of inflation - was at $96. Currently it's at $70.
If Warsh shifts the Fed's focus from core PCE to trimmed-mean PCE, the inflation picture already looks much less alarming. Add in expectations of falling inflation, a stronger dollar and policy rates that are still relatively restrictive compared with much of the developed world, and the case for new hikes starts to look shaky.
That does not mean rate cuts are imminent. But it does mean the market may be anticipating rate hikes that will never come.
In that event, U.S. stocks may have a meaningful upside catalyst hiding in plain sight. That's particularly true for real estate, utilities, technology and other rate-sensitive sectors.
Because when investors stop bracing for hikes that never arrive, that fear gets priced out of the market. And when that happens, the stocks being held back by rate anxiety today could lead the next leg higher.
Robert Ross is the founder of TikStocks and author of "A Beginner's Guide to High-Risk, High-Reward Investing" (Adams Media, 2022). A former chief equity analyst at Mauldin Economics, Ross writes the investment newsletter Let's Analyze on Substack and hosts the weekly "Room to Run" podcast.
-Robert Ross
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June 30, 2026 09:31 ET (13:31 GMT)
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