David Sterling: The May PCE report is out. Four point one percent year-over-year.
Megan Skiendel: Three-year high.
David Sterling: Fastest since April 2023. Core PCE, 3.4. And here's the point — I want your read before I give mine.
Megan Skiendel: Honestly? My read is that Kevin Warsh is already cornered and he's been chair for thirty days. Here's what happened — he debuts May 22nd, announces this facts-only, no forward guidance stance, which I actually think is a coherent philosophy. But the immediate consequence of abandoning forward guidance is you make every data release a trigger. So when the BEA drops 4.1% PCE, CME FedWatch immediately reprices to 64% cumulative probability of a hike by September. Warsh didn't set that expectation. The data did. Which is technically what he asked for — and that is the trap.
David Sterling: So your claim is the trap is self-inflicted.
Megan Skiendel: Completely self-inflicted. He built the mechanism himself.
David Sterling: Well, here's what I want to pump the brakes on. The mechanism is self-inflicted, fine. But the actual policy stance — the math — is dovish. As of June 24th, TMC Research, James Picerno's neutral rate model, has the effective Fed Funds Rate sitting roughly 40 basis points *below* neutral. Below. That's not hawkish. That's accommodative on the mechanics.
Megan Skiendel: Wait — below neutral while he's talking like he might hike?
David Sterling: Correct. And then layer on the inflation source. The May PCE spike — 4.1%, driven significantly by energy prices tied to the Iran conflict. Rate hikes don't drill oil wells. They don't resolve a geopolitical supply shock. The tool doesn't fit the problem.
Megan Skiendel: Megan Skiendel: The shopping cart — I mean, PCE adjusts when prices rise, right? It's not a fixed list like CPI. So it's actually catching substitution behavior. Which means the 4.1% is the *honest* number, and the honest number is still being distorted by Iran.
David Sterling: That's exactly it. PCE is the shopping cart that swaps cheaper items automatically — that's why the Fed formally adopted it in 2012. More honest than CPI. And the honest read says: energy is doing the heavy lifting. Core PCE, 3.4%. Still elevated, but the breadth story is less alarming than the headline.
Megan Skiendel: And CME FedWatch shows 65-plus percent probability of *holding* in July. So markets aren't even pricing an imminent move — just September optionality. Which means Warsh is fighting a rhetorical war against an inflation print the FOMC literally cannot fix.
Megan Skiendel: But here's where I think the hot take actually holds — June 23rd. KOSPI triggers its second circuit breaker of the month. Second. In June alone. That's not US sentiment bleeding overseas. That's EM carry trade managers hitting the exit because they're repricing refinancing risk in real time.
David Sterling: The KOSPI breaks. I'll admit that genuinely surprised me.
Megan Skiendel: It should. Because that's not noise — that's capital preservation kicking in. When South Korea breaks, the carry trade unwind is already happening. The tightening consequences are live before Warsh touches a single rate.
David Sterling: I want to push on the false-alarm objection, though, because — look, bond futures priced hikes in 2015, 2018, neither materialized. But actually... a new chair's first 90 days is categorically different. Warsh's credibility isn't established yet. He has no track record to borrow against. So the market isn't crying wolf — it's testing whether the philosophy survives contact with a 4.1% print.
Megan Skiendel: And Politico lands the election-cycle piece right on top of that. Three-year-high inflation, Trump wanting cheap money — that friction doesn't reduce Warsh's incentive to hike. It increases it. If he folds, he's Powell's shadow forever.
David Sterling: That's the credibility trap closing. The communication vacuum he built — the facts-only stance — markets fill silence with worst-case. The Hill flagged June 25th that the breadth of May price increases beyond energy actually alarmed economists. So even stripping Iran, the core structure gives him political cover to move.
David Sterling: Fine. The credibility trap is real. I'll grant you that. But what that actually means — wait, let me back up — what that means structurally is that Warsh may be about to fight a geopolitical fire with a monetary hose. The Bureau of Economic Analysis prints a number, Warsh has to respond to it. That's the mechanics. That's the box he's in.
Megan Skiendel: And energy prices have probably peaked. So the 4.1 likely comes down on its own.
David Sterling: Probably, yes. Which is the sharp edge of this. If he hikes in September primarily to prove he's not Trump's Fed — not because the inflation structure actually demands it — the inflation number likely falls anyway. But you've still got a rate hike landing into a supply shock, with KOSPI already breaking circuit breakers and EM credit conditions tightening. History won't remember the independence. It'll remember what broke.
