Mark Delaney: Michael, hey — you look like you've been staring at a spreadsheet since six a.m.
Michael C. Vincent: The Bureau of Economic Analysis had that effect on me. Gasoline, Mark. Up 40.5% year-over-year. That number alone rewrites the morning.
Mark Delaney: Right — and that's tied directly to the Iran war, that's not some domestic policy thing, that's a shooting war spiking an input that every single American touches twice a week.
Michael C. Vincent: Which is exactly what today is. The May PCE report — the Federal Reserve's preferred inflation gauge — lands at 4.1% year-over-year. Kevin Warsh walks into the chair's office and this is the first number on his desk.
Mark Delaney: Hold on — 4.1, that's more than double the Fed's target. Like, not close to double. Actually double.
Michael C. Vincent: More than double. And the spending number from the Commerce Department's BEA arm — nominal PCE up 0.7% in May, above the 0.6% forecast. That headline looks like confidence.
Mark Delaney: Except — okay, real spending, adjusted for inflation? 0.3%. And in April it was, uh, it was flat. Zero. So are people actually confident or are they just... paying more for the same stuff and calling it spending?
Michael C. Vincent: That is precisely what we're trying to work out today.
Mark Delaney: Yeah, but that's the thing that's been nagging at me — because the headline sounds like people are flush, right? Spending is up, growth is up, the Dow's hitting records. But if you actually look at where the money is coming from... personal income rose 0.7%. Disposable income, same — 0.7%. Which is exactly what spending rose. So it's not like people have extra. It's like — okay, imagine your paycheck went up seven cents on the dollar but everything at the store costs four cents more. You're spending more money. You are not buying more stuff.
Michael C. Vincent: Treading water.
Mark Delaney: Treading water. And some people are quietly going under the surface to stay there — dipping into savings, or, uh, you know, the credit card takes a little more of the weight. That's what the Bureau of Economic Analysis data is actually showing when you separate nominal from real.
Michael C. Vincent: Now, the structural confirmation of that is buried in the Q1 GDP revision. You see, the headline number was revised up — 2.1% annualized, from 1.6%. Sounds like an upgrade.
Mark Delaney: Wait — revised up, but that's the bad version?
Michael C. Vincent: Open the hood. Consumer spending inside that same quarter was revised down — from 1.4% to 0.5%. The aggregate looked fine. The household-level number had been deteriorating the whole time. The headline concealed it.
Mark Delaney: So the GDP number was kind of... I mean, not lying exactly, but it was covering for something. Real spending stalled in April, barely moved in May — that's not a confident consumer. That's someone white-knuckling it.
Michael C. Vincent: And the buffer, as the Bureau of Economic Analysis data makes plain, is thinning. The savings rate is at its lowest since 2022. Not rock bottom historically — but the direction matters as much as the level.
Mark Delaney: Which means the spending number in that May report isn't evidence things are good. It's evidence people haven't stopped yet. There's a difference.
Michael C. Vincent: But that's where the circulating take falls apart. Everyone sees 4.1% PCE and says — Fed must hike, full stop. And I'd tell that story a little differently. Because that 4.1 is not one problem. It's two problems wearing the same number.
Mark Delaney: Wait — two separate problems inside the same headline?
Michael C. Vincent: The Iran war drove gasoline up 40.5% year-over-year — a 3.9% monthly jump in energy goods alone. That is a geopolitical supply shock. It is real, it is measurable. But preliminary U.S.-Iran peace negotiations have already sent oil prices lower. That part of the inflation reading may be on its way out.
Mark Delaney: Okay, but — and this is what I keep getting stuck on — core PCE, which strips out food and energy entirely, that came in at 3.4% in May. Up from 3.3% in April. That's actually the fastest pace since late 2023. So even if the Iran shock fades, that number doesn't.
Michael C. Vincent: That's exactly the stress test. And it's where hiking into a cooling energy price looks, you see, potentially foolish. The Fed could tighten — at 3.5 to 3.75% federal funds rate — right as gasoline falls back, declare victory on the headline, and still have 3.4% core inflation sitting there completely untouched.
Mark Delaney: Because the structural piece was already baked in before Iran lit anything on fire.
Michael C. Vincent: Businesses. That's the mechanism. They're still borrowing, still spending on inventory and inputs — the demand side is keeping core inflation alive independent of whatever happens in a peace negotiation. The CME Group FedWatch Tool has roughly 80% odds of at least a quarter-point hike by year-end. But those markets may be pricing the headline, not the split.
Mark Delaney: I mean — 80% odds, that feels really confident for a situation where half the number might be about to fix itself, you know? Like, a rate hike to fight an Iran war that might be ending.
Michael C. Vincent: And we haven't even touched what the labor market just did — that's where Kevin Warsh's signal conflict gets genuinely complicated, because it gets harder before it gets easier.
Mark Delaney: And the labor market is — okay, 57,000 jobs added in June. That's the Bureau of Labor Statistics number. Consensus was 115,000. And May was already revised down to 129,000, so this isn't just one weird month, this is — wait, when did the crack actually start?
Michael C. Vincent: That is the question the Fed cannot answer cleanly. And that uncertainty is now Warsh's problem to own publicly.
Mark Delaney: Hold on — because markets haven't blinked. CME Group FedWatch still sitting at 80% odds of a hike. Which means markets are basically pricing a world where the labor market crack isn't real yet, or doesn't matter enough.
Michael C. Vincent: Picture it for a moment. A CFO at a mid-sized Ohio manufacturer — not Tuesday morning, not coffee and spreadsheets. She's standing at a whiteboard Friday afternoon, signing off on a new credit line for inventory because her customers haven't canceled orders yet. Input costs are up. She signs anyway. That decision — multiplied across hundreds of firms — is exactly why core PCE sits at 3.4% regardless of what Iran does.
Mark Delaney: So she's the inflation. Her borrowing is the inflation.
Michael C. Vincent: The demand side, yes. And if Warsh hikes into a softening labor market — 57,000 payrolls, remember, against a backdrop of 4.1% PCE — he risks accelerating job losses in a labor market that is already cracking. Hold, and inflation runs above the Fed's 2% target for a sixth consecutive year. Neither option is clean.
Mark Delaney: Six years. I mean — that's not a bad stretch anymore, that's just... the condition. And Warsh walks in inheriting all of it with zero runway on credibility because the Fed kept saying inflation would fall and here we are at 4.1.
Michael C. Vincent: His first press conference isn't really about the data. It's about whether markets believe he actually sees what's coming — because the institution has called this wrong for three years running.
Mark Delaney: So what do we actually watch? Like specifically — the thing that breaks the tie here.
Michael C. Vincent: The spending surge has a shelf life. It's measured in savings accounts and credit limits — and when that buffer hits zero, you have to ask what level of consumer activity a higher-rate path would actually support. The honest answer is: less than we have now. And that path runs through recession before it runs through 2% PCE.
Mark Delaney: Yeah — I can't shake this. Because if the Fed hikes into 57,000-payroll territory, the labor market deterioration probably accelerates faster than inflation actually cools. But if they hold, PCE is running double target and has been for — well, you said it, six years. So either path is bad. I keep wondering if there's a third variable nobody's modeling. Something outside the Fed's toolkit entirely. Like, what if it's not a policy decision that forces their hand — what if it's something that just... happens?
Michael C. Vincent: I don't have a clean answer to that.
Mark Delaney: No. Me neither.
Michael C. Vincent: Good conversation. I mean that — you kept me honest on the distribution piece.
