Consumer prices were up 3.5% in June from a year earlier, beating expectations and improving from the 4.2% inflation rate in May. Most analysts had expected the rate to be at 3.8%.
Over the month, consumer gasoline prices dropped substantially from May. But even excluding food and energy products, prices were broadly flat, which is evidence that inflation trends have improved.
But oil prices have recently rebounded after the end of the Iran War Ceasfire. That suggests that July won’t bring as much good news as this current inflation reading.
Let me leave you with this…
Kevin Warsh’s swearing-in as the new Fed Chair on May 22, 2026, prompted a great deal of reflection on the tenure of the prior chairs and speculation about the new chair’s interest-rate policies. The following chart shows the last eight Fed Chairs, their start dates, and the yield on the 10-Year Treasury Bond at the time.
Fed Chair Date Sworn In 10 Year Yield %
Arthur Burns 1/31/1970 7.754%
G. William Miller 3/8/1978 8.034%
Paul Volcker 8/6/1979 8.914%
Alan Greenspan 8/11/1987 8.722%
Ben Bernanke 2/1/2006 4.559%
Janet Yellen 2/3/2014 2.578%
Jerome Powell 2/5/2018 2.707%
Kevin Warsh 5/22/2026 4.562%
The 10-year Treasury note yield is not a rate controlled directly by the Fed. But it is a good proxy for mortgage interest rates and corporate debt. Mortgages and corporate debt are important drivers of the real economy, and their yields reflect economic conditions generally.
Conventional wisdom suggests the Fed must raise interest rates to control inflation. But raising rates would probably be a mistake given the history and actions of many of the Fed Chairs.
The interest rates shown only tell a small portion of the story. To see the real picture, one must subtract the current rate of inflation to get what is known as a Real Interest Rate.
The concept is that if you’re getting a 5% yield on a bond, and inflation is 4%, you’re really only getting 1% on your money. In fact given certain conditions, if the interest rate is higher than the yield, you’re losing money.
The following chart includes an adjustment for inflation…
Fed Chair Date Sworn In 10 Year Yield % Real Rate %
Arthur Burns 1/31/1970 7.754% 2.03%
G. William Miller 3/8/1978 8.034% 0.44%
Paul Volcker 8/6/1979 8.914% -2.44%
Alan Greenspan 8/11/1987 8.722% 4.29%
Ben Bernanke 2/1/2006 4.559% 1.33%
Janet Yellen 2/3/2014 2.578% 0.96%
Jerome Powell 2/5/2018 2.707% 0.31%
Kevin Warsh 5/22/2026 4.562% 0.76%
The chart revised for real rates shows some interesting data. Kevin Warsh is starting as Fed chair with the fourth-lowest nominal rate and the fourth-lowest real rate out of the last eight chairs.
Looking solely at this data one could conclude that real rates are not particularly high as Warsh enters office. But if inflation rises from here which is likely in the short run, then real rates could actually go negative unless Warsh raises nominal rates.
This would support a policy-rate increase by the Fed in the coming months.
But that knee-jerk reaction to inflation is not the right course. The reason is that inflation has two causes.
1 – Supply-chain disruption, or what economists call cost-push inflation. In effect, higher commodity costs push higher costs up the supply chain until they reach the consumer.
2 – Consumer behavior, or demand-pull inflation. The idea is that consumers pull purchases forward to avoid future price increases. This increases the velocity of money and causes price increases in a way that feeds on itself.
The difference is critical in terms of policy. The cure for cost-push inflation is simply to wait. Higher costs tend to extinguish themselves through demand destruction and substitution. It’s self-negating.
The cure for demand-pull inflation is to raise interest rates. That tends to lower velocity and raise the cost of using credit. Demand-pull inflation is self-reinforcing unless some force intervenes to change behavior. That force can be higher interest rates.
Fed Chair Burns responded to an oil-price shock by raising rates, a decision many economists believe worsened the 1974 recession. He would have done better to keep real rates lower and let the price of gasoline stabilize, which it eventually did.
Fed Chair Paul Volcker caused two of the worst recessions in U.S. history in 1980 and 1981–82 when he raised interest rates to 20% to combat an extreme case of demand-pull inflation. That was needed to some extent, but he could have avoided the worst effects by raising rates sooner.
Burns and Volcker both presided over recessions, but for entirely different reasons. Burns raised rates when he should have refrained. Volcker raised rates but waited too long to do so. The difficulty was that Burns faced a supply-chain disruption while Volcker faced a change in consumer behavioral psychology.
Warsh finds himslef in a situation similar to the one Burns encountered, where inflation is being caused by suppy chain disruptions. Warsh should cut rates to help the economy while cost-push inflation cools down on its own. Instead,
Warsh is being urged to apply the Volker Remedy of higher rates. This may bring down inflation, but at the cost of a recession. Warsh himself in a situation similar to the one Burns encountered, where inflation is being caused by supply-chain disruptions. Warsh should cut rates to help the economy while the cost-push inflation cools down on its own.
Instead, Warsh is being urged to apply the Volcker remedy of higher rates. That may bring down inflation, but at the cost of a recession.
As usual, the Fed staff and mainstream media focus on the myth of Volcker, excluding other analyses and policy choices. Those who don’t study history are doomed to repeat it.
I present this evidence as a way for many to plan.
If cooler heads prevail and the Fed doesn’t raise interest rates in the short term, our economy has a chance to continue chugging along. But if they raise interest rates, the opposite is quite possible.
And right now, many consider the chances of either eventuality to be a coin flip.
Be cautious and conservative in your business planning. Watch what happens over the next several months.
I wouldn’t be in a hurry to begin new business plans. If there’s any fat in your organization, cut it now. Horder your cash like a Viking King.
If the music stops, I don’t want you to be left without a chair.
The problem is that we don’t actually know where Chairman Warsh’s head is at. We haven’t yet seen him over a course of ground.
Hang in there. Be prepared for any eventuality.
If you’re having problems with your accounting and tax work, please don’t hesitate to contact us. We’d love to help.
We’re all going to get through this. Let’s get through it together…
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President
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