Solutions Economic and Market Watch

Welcome to the Economic and Market Watch podcast for the week of June 6, 2026. This is Antony Davies.

Two things happened last week that are bad news for those hoping for interest rate relief. Both come courtesy of the Bureau of Economic Analysis.

The first is actually good news.

The BEA estimates that the economy grew at a 2.1% annualized rate in the first quarter of this year. That's up from its previous estimate of 1.6%. The 2.1% number is the last of three consecutive estimates and is now considered the canonical number for Q1. That's less than the average economic growth since 2022, but reasonably solid and markedly better than what we thought it was going to be. The second piece of news is less welcome.

PCE inflation -- that's the principal inflation measure the Fed monitors -- averaged 4.6% in Q1. That's the highest inflation has been since 2022. Forecasters were anticipating that Q1's inflation would come in hot and they're expecting it to cool to around 2.5% by the end of the year. Americans, meanwhile, are responding to the inflation, not by cutting back on spending, but not by borrowing more either. They're saving less.

Last month, the average American saved 3% of his paycheck. That's down from 5% at this time last year and 6% the year before that.

The saving rate today is lower than at any point since June 2022 when the post-COVID inflation peaked. Now as then, consumers are trying to maintain their standards of living without piling on more debt, and that necessarily means saving less. So here's the recap for the first quarter of 2026. Economic growth was 2.1%, slightly below average, and inflation was 4.6%, the highest since 2022. And that brings us to the Fed and interest rates.

Think of Fed policy as a valve on a gas stove. Looser policy, like cutting interest rates, opens the valve. The flame gets hotter, so food cooks faster. That's the upside: more economic activity.

But the hotter the flame gets, the more you risk burning your dinner. That's the inflation problem. Tighter policy like raising rates closes the valve. The flame cools and that helps bring inflation down, but it also means the food cooks more slowly.

That's the trade off. The same policy that cools inflation can also slow economic growth.

And therein lies the bad news for borrowers. The current combination of hotter inflation inflation and solid growth not only gives the Fed no reason to cut rates, it presents the opportunity to raise them.

Since December, futures markets have been anticipating rate cuts in 2026. But for the first time, last month markets priced in a rate hike.

As of this recording, futures markets are showing a 75% chance of one 25-basis point hike by the end of the year and a 35% chance of two hikes. The silver lining, at least for some of us, is that Fed rate hikes mostly impact short-term interest rates. Remember the complaints back in the second half of 2024, when the Fed cut rates a total of 100 basis points and long-term rates barely reacted? We'll likely see the same thing in the other direction if the Fed raises rates.

The bottom line is that markets are telling long term borrowers not to expect relief and short term borrowers to expect to pay more. We might not like it, especially if we're borrowing money, but this is what fighting inflation looks like.

Thankfully, the economy is strong enough that the Fed can keep pressing. The alternative is that the Fed has to lower rates despite the inflation because the economy is falling apart. This is better.

This is Antony Davies for the Economic and Market Watch podcast. Thank you for listening.

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