Economic Outlook - July 2026
- The Federal Open Market Committee (FOMC) decided to maintain its target range for the federal funds rate at 3.50% – 3.75% at its June meeting, as expected, in a 12 – 0 vote. According to the official statement: “Economic activity is expanding at a solid pace… Productivity growth and capital investment are strong… Job gains have kept pace with the workforce, and the unemployment rate has changed little. The FOMC also noted that “inflation remains elevated relative to the Committee’s 2% goal.” The market is now pricing-in at least one 25 basis point (0.25%) rate increase in 2026.
- The June FOMC meeting was the first for its new Chairman, Kevin Warsh. In his post-meeting comments, Chairman Warsh emphasized the Committee’s near-term focus on price stability, without the usual reference to its other mandate of maximum employment. Bond markets regarded Warsh’s comments as mildly hawkish – leaning toward higher rates – which was reflected in a flattening of the yield curve, with rising short-term rates and falling long-term rates. Warsh also announced the creation of five task forces to review communications, data sources, inflation framework, productivity and jobs, and the balance sheet. Each new Fed Chair faces early challenges. We expect adjustments at the Fed could create additional market volatility over the next year.
- In May, the Consumer Price Index (CPI) for All Urban Consumers rose 0.5%, seasonally adjusted, and rose 4.2% over the last 12 months, according to the U.S. Bureau of Labor Statistics. This was the highest annual CPI print in three years, although in line with expectations. The Iran War has pushed up prices of oil, gasoline, plastics, and fertilizer, which feed into headline CPI. The Core CPI (less food and energy) increased 0.2% in May, up 2.9% year-over-year. Median inflation expectations for one year are 3.5%, falling to about 3.0% in five years. The recent fall in energy prices may cause a drop in the headline inflation in the coming months.
- Total non-farm payroll employment increased by 172,000 in May, and the unemployment rate was unchanged at 4.3%, according to the U.S. Bureau of Labor Statistics. Job gains occurred in leisure and hospitality, local government, and health care. Employment in financial activity declined. ADP Research reported private employers added 122,000 jobs in May noting, “Hiring was more broad-based in May than we’ve seen in the last few years.” Gains were experienced in small, mid-sized, and large companies. Solid employment data will allow the Fed to focus more on inflation. Economists expect job growth in June to decelerate to 110,000.
- Existing-home sales increased 3.2% in May, according to the National Association of Realtors (NAR). On a year-over-year basis, sales rose in all regions of the country except in the Northeast. According to NAR’s Chief Economist, “improving affordability is helping drive this momentum,” noting that mortgage rates are lower than one year ago; the 30-year fixed rate mortgage averages 6.5%. However, home prices remain elevated and continue to be a headwind for the housing sector. According to the U.S. Census Bureau, sales of new single-family houses in May fell 6.8% from the period a year ago. The recent fall in long-term rates may offer a catalyst.
- R.I.P., Alan Greenspan. Remembered with Irrational Exuberance.
Sources: FactSet, Dow Jones Publishing, Bloomberg, Bureau of Labor Statistics, S&P Global, U.S. Bureau of Economic Analysis, Commerce Department, U.S. Federal Reserve
Disclosure: This commentary reflects the opinions of Welch & Forbes based on information that we believe to be reliable. It is intended for informational purposes only, and not to suggest any specific performance or results, nor should it be considered investment, financial, tax or other professional advice. It is not an offer or solicitation.
For more information, call 617-557-9800, or email info@welchforbes.com.