The Personal Consumption Expenditures price index rose 3.7% in June from a year earlier, the Commerce Department reported Thursday, and the Federal Reserve’s policy-setting committee responded by holding its benchmark interest rate steady for the fifth consecutive meeting. Three of the Fed’s own regional presidents dissented, wanting higher rates to fight inflation — the most dissents in a single direction in a decade. Chair Kevin Warsh told the BBC the central bank had no “magic wand.” The magic wand is the federal funds rate. The Fed has it. The majority is refusing to use it.
Here are the numbers.
The Commerce Department’s advance estimate put second-quarter GDP growth at 1.5 percent on an annualized basis, down from the 2.1 percent final first-quarter reading and short of the roughly 2 percent consensus among forecasters. The GDP slowdown came from lower government spending, investment, and exports. Strip out the consumer, and the rest of the economy contracted. Consumer spending, two-thirds of economic activity, rebounded to a 3.2% annualized rate after stalling at 0.5% earlier in the year. The eurozone economy grew at a 1.8 percent annualized rate over the same quarter — outpacing the United States for the first time since the fourth quarter of 2025. The growth differential that has defined the post-2008 international comparison has reversed in a single quarter. The eurozone — an economy with lower productivity growth, tighter fiscal envelopes, and an energy-import dependence the United States does not share — grew faster than the United States on the metric the Federal Reserve and the markets track most closely.
The inflation story is three numbers. The PCE Price Index — the Fed’s preferred inflation gauge since the January 2012 Statement on Longer-Run Goals — rose 3.7 percent in June from a year earlier, down from a 4.1 percent annual increase in May. Core PCE, which excludes volatile food and energy prices, rose 3.3 percent from a year ago. Prices have remained above the Fed’s 2 percent target for more than five years. The inflation rate sits 85 percent above the target the Fed sets and has failed to reach for more than five years.
The Fed’s statement said US economic activity was expanding at a “solid pace despite uncertainty caused by the conflict in the Middle East.” That gap — between a 1.5 percent reality and a “solid pace” label — is the policy stance itself. It is not a communication stumble; it is the choice to call stagflation something else. A 1.5% headline with a contracting non-consumer economy and inflation running more than a percentage point above target is not solid. Warsh’s remark that there is no magic wand is not humility about the limits of monetary policy — it is a refusal to name the instrument he already holds. The three regional presidents who dissented named it for him. When the central bank itself fractures publicly, in the same direction, in numbers not seen in ten years, the polite interpretation is that the institution is having a vigorous internal debate. The less polite interpretation is that the policy is wrong and the people who run it know it.
The mechanics of that choice are clear. Higher rates slow the economy by making credit more expensive, reducing demand, and eventually bringing down prices. The dissenters judge that the cost in forgone growth is worth bearing. The majority judges that the economy cannot tolerate more tightening, or that inflation will subside on its own, or — more plausibly — that the asset markets and financial conditions that higher rates would disrupt are too fragile to risk. The three dissenters are the ones who looked at the same data and concluded that price stability is the Fed’s primary job and that it is not being done.
The costs fall asymmetrically. Households are spending more and getting less. The Harris Poll found two-thirds of Americans, including half of Republicans, have little faith the federal government will address high prices. Gasoline above $4 a gallon, driven by the Iran conflict, lands on commuters, not on the bond traders whose portfolios the Fed’s posture protects. The motor vehicle sales the Commerce Department tallied were disproportionately light-duty trucks; prescriptions, a non-negotiable expense. Rising prices on inelastic goods do not reflect consumer strength. They reflect a transfer from household budgets to corporate revenue, and the Fed’s inaction is letting that transfer continue. Employers added an average of 92,000 jobs a month through the first half of 2026, up from fewer than 10,000 a month in 2025. The hiring rebound is real. So is the gasoline back above $4 a gallon, the 3.5 percent consumer-price increase that pushed consumer spending up 3.2 percent annualized, and the inflation rate the Fed cannot bring back to its own target. A worker whose wage gains are eaten by a 3.7% inflation rate, month after month, is not living in an environment of price stability. She is living in an environment where the central bank has decided that the pain of disinflation is politically or financially unaffordable, and that her budget is the acceptable pressure-release valve.
The historical reference is not subtle. The 1970s pattern — energy shock, inflation persistence, central bank holding back from action — produced a decade of stagflation that took the Volcker disinflation of 1979 through 1982 to break, at the cost of the deepest recession since the Great Depression. Volcker, who broke the back of double-digit inflation in the early 1980s, also questioned whether a rigid 2% target served the Fed’s mission well — and the doubts he raised in his later years about a precise numerical anchor are worth taking seriously in any era when the committee is missing that anchor by 170 basis points. His own standard, that expected price changes should not alter business or household decisions, is the one the current committee appears to have abandoned. The current energy shock is smaller; the inflation persistence is comparable; the central bank posture is more accommodative than Volcker’s was at any point after the October 1979 turn. With GDP below the consensus forecast and inflation 85 percent above the Fed’s own target, the economy is delivering growth that feels like stagnation to every household paying over $4 a gallon — the textbook definition of stagflation, even if the underlying numbers are less extreme than 1975.
The AI boom, which economists cited as the biggest game in town, is concentrating its gains in a handful of sectors and regions, including Ireland’s 3.9% quarterly surge. The rest of the American economy is being asked to run on consumer spending financed by rising debt and an assumption, implicit in five straight holds and the majority’s refusal to act on the dissenters’ warning, that inflation will moderate without further tightening. The European Central Bank, by contrast, raised rates in June and held at 2.25 percent last week — a full percentage point below the Fed’s upper bound and below US inflation by the widest margin in years — and still delivered faster annualized growth. A central bank that refused to look away from its target did not have to choose between price stability and expansion. The Fed’s majority did. It chose neither to fight prices nor to let growth accelerate; it chose the path that protects neither household nor worker, and calls the result “solid.”
There are three responses to that finding. Raise rates until inflation returns to target, and accept the recession risk that historically accompanies the late stages of monetary tightening. Accept higher inflation permanently and revise the target upward to ratify the failure. Or change the policy mix — broaden the tax base, restore the fiscal anchor, accept that monetary policy cannot deliver price stability on its own when the fiscal authority is running a structural deficit and an energy-shock-rattled supply side is doing the rest of the work. The Federal Reserve, as currently constituted, has chosen the second option in practice while pretending to be pursuing the first. The dissent pattern at the July meeting is the institutional confirmation that the polite consensus is breaking. Two-thirds of Americans, including 49 percent of Republicans, told a Harris Poll survey they have little faith the federal government will address high prices. That number is the public-side confirmation of what the dissent pattern shows on the institutional side. The policy is wrong. The people running the policy know it. The people being asked to live under the policy can see it.
The score is the score. The chair of the Federal Reserve does not get to grade it.