The Fed Fiddles While the Economy Burns_#26.26
June 29, 2026
The Fed-funds futures market implies a 70% chance the Fed will leave its target rate unchanged until at least Sept. 16, 2026.
Yet many signs of overheating suggest tighter monetary policy is needed now; these include but are not limited to:
1) GDP at 101.6% of potential;
2) stock-market valuation in the uppermost range of historical experience;
3) plummeting national and personal saving rates;
4) rising headline and core inflation as well as long-term inflation expectations drifting away from 2%; and
5) a negative real Fed-funds rate.
Why is the Fed fiddling while the economy burns?
Who knows? They’re not talking.
Signs of overheating in output, asset markets and saving rates. GDP in Q1.2026 was 1.6% above the Congressional Budget Office’s estimate of potential (i.e., non-inflationary) output, the largest overshoot since 2006.
The June 2026 Cyclically Adjusted Price-Earnings (CAPE) ratio was in the 99th percentile of all months since Jan. 1881, exceeded only during the 1999-2000 bubble.
The net national saving rate of 0.3% during the last eight quarters was the lowest since the aftermath of the Great Recession (2009-11).
The personal saving rate declined from 5.8% to 3.0% in the two years since May 2024, reminiscent of the sharp decline from June 2004 to June 2006 (from 5.4% to 2.9%; see Fig. 1).
Rising inflation and a negative real Fed-funds rate. Fig. 2 shows core inflation hitting 3% in the six months through June 2006; while core inflation exceeded 4% between Dec. 2025 and May 2026 (Fig. 3).
While the Fed maintained a positive real Fed-funds rate into 2006, it became negative in 2026. The Cleveland Fed’s model of 10-year inflation expectations hit 2.5% in Q2.2026, the highest since Q3.2007.
Why? Fed chairman Kevin Warsh refuses to explain why the Fed is fiddling while the economy burns.
Figure 1
Figure 2
Figure 3
Sources: Bureau of Economic Analysis: Federal Reserve Board; author calculations.