Our weekly podcast by Kevin Lings:

‍

New US Fed chair shakes up monetary policy

In this podcast, STANLIB’s chief economist, Kevin Lings, discusses South Africa’s May inflation rate, which increased by 4.5% year-on-year, mainly due to the fuel price. He notes, however, that there are few signs of secondary inflation effects in key categories. Kevin also unpacks some of the important changes to US monetary policy, and Federal Reserve market communication under new Fed chairman Kevin Warsh.

The focus areas during the week included:

‍

• The S&P 500 index closed the holiday-shortened week up 0.6%, with sentiment broadly supported by news that the US and Iran had signed a memorandum of understanding on 17 June. This cleared the path to reopening the Strait of Hormuz and helped to push oil prices lower. Unfortunately, more recent news reports suggest that the agreement to reopen the Strait of Hormuz does not appear to have worked. It appears that Iran has declared the Strait closed in response to ongoing Israeli strikes in Lebanon – although the US and Iran are currently holding talks in Switzerland aimed at securing a permanent ceasefire. The Brent oil price is currently just above $80/barrel, up from a recent (brief) low of $77/bbl on Thursday, 18 June.
  ‍
• The STOXX Europe 600 index finished the week up 0.4%, also encouraged in the early part of the week by news that the US and Iran had reached an agreement and signed a memorandum of understanding. Japan’s stock markets surged, with the Nikkei 225 Index gaining an impressive 7.9%, helped by technology stocks and a continuation of the AI theme. Unfortunately, SA’s All-Share Index declined by 0.1%. It was hurt by a 5.1% decline in the Resource 10 Index, which was almost entirely offset by a 4.3% gain in the Financial 15 Index.
  ‍
• US government bonds generated negative returns throughout much of the week. Short-term yields rose sharply after the US Federal Reserve’s (Fed) Federal Open Market Committee (FOMC) meeting on Wednesday. For example, in the week the yield on the two-year government bond rose from 4.09% to 4.19%. In contrast, the yield on 10-year bonds finished the week slightly lower at around 4.46%, with the 2/10 yield gap narrowing by 12 bps to 0.27%.
  ‍
• The US dollar gained 0.9% against the euro, mainly because of the more hawkish tone of the FOMC meeting. It has rallied by 2.3% since the beginning of the year. Unsurprisingly, the rand weakened by 1% against the dollar, but it has gained 0.7% year-to-date, helped by some improvement in SA’s economic fundamentals, which are largely reflected in credit rating upgrades.
  ‍
• The FOMC decided to leave the Federal Funds target interest rate unchanged at a range of 3.5% to 3.75%. This was in line with market expectations. The Fed started the interest rate cutting cycle in September 2024 and has cut rates on six separate occasions, by a total of 175 bps, since then. None of the 12 voting FOMC members dissented on the rate decision. Importantly, the FOMC policy statement was significantly shorter than previous statements and provided no forward guidance, which increased the market’s focus on the “dot-plot” data. This revealed that nine members of the FOMC expect interest rates to increase later this year (six members expect two or more rate increases this year). The dot-plot is a lot more hawkish than prior dot-plots. Chair Kevin Warsh did not submit projections or contribute to the “dot-plot”.
  ‍
• On the economic backdrop, the FOMC statement indicated that activity was expanding at a solid pace, despite elevated uncertainty due, in part, to the conflict in the Middle East. Productivity growth and capital investment are strong. Job gains have kept pace with the workforce, and the unemployment rate has hardly changed. Inflation remains elevated, partly reflecting supply shocks that have driven price increases in certain sectors, including energy.
  ‍
• In the FOMC press conference, Warsh highlighted that key areas of monetary policy will be investigated (using five specific taskforces) over the coming months, including the role of Fed communication, the relevance of the Summary of Economic Projections (SEP), the size of the Fed’s balance sheet, the inflation framework, and the impact of AI (and other technologies) on productivity. These “taskforces” are expected to mostly complete their work by year-end. At this stage it seems clear that the Fed will provide little to no forward guidance on monetary policy. The number of press conferences is likely to be scaled back substantially and they will be held only when “there is something important to say”. The Fed will look for new sources of information to assist with decisions – especially more timely information that is less prone to revision. The SEP will be heavily revised or scrapped entirely, including the “dot-plot”, and there will be substantial changes to how the Fed uses its balance sheet. These changes (and others) could prove beneficial, but they also contain some important risks, including increased market volatility and a lack of clarity on the Fed’s reaction function as the data evolves. However, Warsh argues that understanding the Fed’s reaction function is not what the market should focus on. Ultimately, this new approach will be judged by the success of monetary policy in achieving the inflation target. In the meantime, the risk to US interest rates appears to be on the upside in the second half of this year.
  ‍
• US retail sales increased by 0.9% m/m in May, ahead of market expectations for a gain of 0.6% m/m. Excluding vehicles, sales rose 0.8%, while the control group of retail spending - which feeds into gross domestic product calculations – increased by 0.7%, also higher than expectations. The month-on-month increase was broad-based, with declines seen only at electronic and appliance stores and restaurants. Higher gasoline prices contributed to the headline gain, with fuel station sales rising 3.4% m/m. The ongoing strength of the US labour market, together with a positive wealth effect, is clearly providing some support to consumer activity, despite weak level of consumer confidence.
  ‍
• The US National Association of Home Builders reported that its housing market index unexpectedly declined by two points to 35 in June. It was hurt by rising building material costs, elevated mortgage rates, and ongoing affordability challenges. Data from the Census Bureau also showed that housing starts dropped by a substantial 15.4% m/m to a seasonally-adjusted annual rate of 1.177 million in May, well below estimates for around 1.445 million.
  ‍
• In May 2026, SA’s headline CPI inflation increased by 0.7% m/m, below market expectations for an increase of 0.8%. Almost all the monthly increase was due to the higher fuel price. Consequently, the annual rate of inflation rose from 4% to 4.5%. This is the highest level of inflation since July, prior to the introduction of the new 3% inflation target. Unfortunately, the large increase in SA’s fuel price in May, coupled with the need to ‘normalise’ the fuel levy in July, has pushed inflation significantly higher and well above target. This prompted the Reserve Bank to increase interest rates by 25 bps on 28 May and could result in a further hike of 25 bps, depending on further indications of “secondary” inflation effects. It could be argued that the higher interest rates will simply aggravate the downward pressure on economic activity and that higher interest rates will do nothing to control fuel inflation. However, the bank will continue to focus on the risk of pronounced “secondary” inflationary effects as companies endeavour to pass on some of the fuel price increase to their customers, as well as the need to control inflation expectations. Encouragingly, core inflation rose by a modest 0.2% in the month (below expectations for an increase of 0.3%). Still, the annual rate of change in core inflation rose further from 3.6% to 3.8%.
  ‍
• Many central banks (including the Fed) held policy meetings in the week. They included the Bank of England (rates unchanged –see discussion below), the Swiss National Bank, which left its key interest rate unchanged at 0%, the Norges Bank (Norway) which maintained its policy interest rate at 4.25% but signalled a future hike is likely, the Bank of Japan(increased rates by 25 bps – see discussion below), and Brazil, which cut rates by 25 bps (see discussion below). Bank Indonesia hiked rates by 25 bps to 5.75% (see discussion below), Botswana held rates steady at 5.5%, Namibia tightened rates by 25 bps to 6.75%, the Czech Republic increased rates by 25 bps to 3.75%, Philippines increased rates by 25 bps to 4.75%, Chile held rates steady at 4.5% for the fourth time in a row, Sweden (Riksbank) maintained interest rates at 1.75% but warned about a possible hike, and Australia (RBA) left its policy rate at 4.35% but said inflation was ‘too high’.
  ‍
• The Bank of Japan (BoJ) raised its short-term policy rate by 25 bps to 1%, taking the cost of borrowing to its highest level since 1995. The move seeks to address inflation risks linked to the war in the Middle East as well as persistent yen weakness. The central bank also announced that it would reduce its monthly purchases of Japanese government bonds (JGBs), continuing its gradual move away from ultra-accommodative monetary policy. The BoJ governor, Kazuo Ueda, was absent from the meeting due to recent hospitalisation, and the post-meeting press conference was presented by Deputy Governor Shinichi Uchida. His remarks were perceived as relatively hawkish. They highlighted the risk that underlying inflation could exceed the BoJ's 2% target and reinforced expectations that the bank will continue to normalise monetary policy through further rate increases.
  ‍
• As expected, the Bank of England kept its base interest rate steady at 3.75% and acknowledged that it was “hard to predict” what will happen to prices because of the Iran war. Annual inflation in the UK was unchanged at 2.8% in May from the previous month and is at its lowest level since March 2025. At the same time, the economic backdrop remains weak.
  ‍
• Brazil’s central bank cut its benchmark Selic rate by 25 bps to 14.25%, marking the third straight rate reduction (the bank’s monetary policy committee, known as Copom, voted unanimously to cut rates). The decision came with a more cautious message. Policymakers said that the cut was appropriate “at this moment”, but highlighted that further rate cuts were dependent on incoming data. The statement acknowledged that both economic activity and inflation have accelerated, and expressed concern that stimulus measures could further support demand and add to price pressures. Markets reacted cautiously, suggesting investors were uneasy with the central bank’s case for additional easing while inflation remains above target. The inflation data for May surprised to the upside, reaching 4.7% y/y, while the central bank increased its Q4 2027 inflation estimate to 3.7% from 3.5%. At the same time, a range of fiscal policy measures continue to support growth, which complicates the inflation outlook.
  ‍
• Bank Indonesia (BI) raised its key interest rate by 25 bps to 5.75%. This is the bank’s third increase in rates in about a month, following a surprise 9 June rate hike and a larger-than-expected 50 bps increase in May. The tightening of monetary policy reflects the BI’s effort to stabilise the rupiah, prevent currency weakness from feeding into inflation, and attract increased foreign portfolio inflows. Governor Perry Warjiyo said the bank would continue to go “all out” to support the currency, using a mix of tools including foreign-exchange intervention, attractive rupiah securities yields, lower hedging costs for foreign investors, repo windows to preserve liquidity, and tighter rules on foreign currency transactions.
  ‍
• China’s economic data for May 2026 suggests continued resilience in industrial production and export-oriented sectors, but ongoing weakness in domestic demand (including consumer spending). Industrial production rose by 4.5% y/y in May, supported by manufacturing activity and external demand, while retail sales fell 0.6% y/y, marking the first y/y decline since late 2022. In addition, fixed asset investment contracted by 4.1% in the January-May period compared to a decline of 1.6% in the first four months of the year. Taken together, the data suggest that export-linked sectors are still helping to support growth but that momentum has not yet translated into a broader recovery in consumption or private sector investment.
  ‍
• China’s property sector continued to dampen overall economic activity, with property investment falling 16.2% y/y during the first five months of 2026. In addition, national home prices remained under pressure in May: new home prices declined at a faster pace than in April and weakness was still evident in many cities. However, conditions are diverging between regions, pointing to a property recovery that is uneven rather than broad-based. For example, new home prices in China’s first-tier cities rose for the third consecutive month, suggesting that policy support measures may be gaining some traction in the country’s largest housing markets.
  ‍
• The People’s Bank of China (PBoC) Governor Pan Gongsheng announced a series of financial sector measures, including steps to increase the use of overnight reverse repo operations, narrow the short-term interest rate corridor, and support the offshore use of the renminbi. Authorities also introduced initiatives aimed at facilitating cross-border financial services and strengthening Shanghai’s role in yuan-denominated asset allocation and risk management. The announcements appear to be part of a broader effort to strengthen China’s financial market infrastructure, improve monetary policy transmission, and support the renminbi’s internationalisation. However, the measures did not appear to represent a major broad-based monetary stimulus package.