Viewpoints: May 2026

Movements in the Federal Reserve Bank of Philadelphia’s state coincident indexes in April were again muted. In the one-month changes, none had increases as high as 1 percent, and only three (West Virginia, Rhode Island, and South Dakota) had gains above .5 percent. On the other side, only four states had declines, all being very modest (Connecticut’s -.16 percent was the largest). Over the three months since January, five states—West Virginia, North Dakota, Idaho, New Hampshire, and Ohio—had increases of 1 percent or higher, with West Virginia’s 1.28 percent on top. Hawaii and Connecticut were the only state with declines; Connecticut’s -.33 percent being the largest. Over the last twelve months, Nevada, Ohio, Idaho, and California clocked increases above 3 percent, with Nevada’s 3.57 percent the highest. Four states were down, with West Virginia’s 2.88 percent loss (obviously conditions there have been turbulent, with steady losses over the year ending in February followed by gains the last two months) being almost three times the size of any other.

The independently estimated national estimates of growth over the last three and twelve months were, respectively, .53 and 1.79 percent. These may be a touch softer than the state figures would suggest.

State labor markets were a bit firmer in April than in prior months, but insufficient to reverse a long lethargic spell. Six states saw statistically significant increases in payroll from March, though none was especially large (Florida had a 40,500 gain, or .4%, while New Mexico was up .6%, or 5,700). Over the last 12 months, the only ones to see statistically significant changes were DC (down 39,100, or a whopping 5.1%, reflecting the slashing of federal jobs), Oregon, down 1.2%, and Nevada, up 1.9%.

Three states reported statistically significant drops in their unemployment rates in April, while two reported declines. None was larger than .2 percentage point (Connecticut’ was up that amount while Ohio’s fell than much). Once again, about half of the states had rates statistically different than the nation’s 4.3%, but once more California was the only one of the very largest states to do so. Rates at or above 5.0% were in DC, Delaware, Nevada, California, Washington, and Illinois, with DC’s again 6.3% the highest. Alabama, Hawaii, North Dakota, South Dakota, and Vermont had unemployment rates under 3.0%, while South Dakota’s 2.4% was the lowest in the nation.

Puerto Rico’s unemployment rate was unchanged at 5.6% and the island’s job count rose 3,600.

Warsh and the bond market vigilantes

The recent bond market sell off is a reminder of the many risks to the market, including Warsh’s appointment as Fed chair. The market is justifiably worried about three of Warsh’s main policy views: (1) productivity growth will solve the inflation problem without help from the Fed, (2) the Fed should be selling off most of its bond holdings and (3) the Fed should be focused on the weakest of the core inflation metrics—the “trimmed mean” PCE deflator.

Independent, but in agreement

President Trump has made it abundantly clear that he wants lower interest rates. Indeed, he has said he will not appoint a Fed chair who does not believe major cuts in the funds rate are warranted and he expects the Fed to cut under Chair Warsh.

Last month, Bessent offered a more flexible message to the Fed. He noted the uncertainty around the Iran war, saying “if they [the Fed] want to wait for some clarity, I understand that.” Indeed, “we should wait for the new chairman, Warsh, and let him lead the next cycle.” Looking ahead, he said, “the conflict will end, prices will come down, and then headline inflation will come down.” This suggests a short honeymoon period for Warsh, followed by a string of rate cuts.

In his campaign for the Fed chair, Warsh has been adamant that he has independently arrived at a similar conclusion. He does not want to lower rates because the President wants it, but because economic fundamentals warrant lower rates. Specifically, he strongly supports two arguments. First, the Fed does not need to hike rates to bring inflation down. Quite the opposite, surging productivity will not only solve the inflation problem, but demands that the Fed cut rates to accommodate .

Second, he argues that any upward pressure on inflation is transitory. Indeed, in his testimony, he argued that the Fed should shift to the “trimmed mean” PCE as its preferred measure of core inflation. This metric strips out the components with both the highest and the lowest inflation. In March, the year-over year increase was just 2.4%, and much lower than other metrics (chart).

President Trump has asked Congress to suspend federal fuels taxes temporarily in order to lower prices paid by drivers at the pump. Unfortunately, doing so probably won't produce the desired result, but energy companies certainly won't object. Here’s why.

A complete version of this commentary is available here.

Grinnin’ Kevin Hassett, a White House economic adviser, said on Fox Business on May 6, 2026: “Credit card spending is through the roof. They’re [households] spending more on gasoline, but they’re spending more on everything else, too.” Hassett went on to say that the spending surge was due to households having “so much more money in their pockets”. Well, if households are running up their credit card balances, yes, they temporarily have “more money in their pockets”. Although Hassett thinks that this is a good thing, I see it as a reason why the increase in energy prices will seep into the prices of non-energy goods and services.

Let’s look at some data that are consistent with Hassett’s credit-card spending hypothesis. Plotted in the chart below are the observations of the eight-week annualized percent changes in commercial bank credit card and other revolving loans. In the eight weeks ended April 29, these loans grew at an annualized pace of 12.7%. So, this is consistent with Hassett’s happy hypothesis about households running up their credit card balances.

Movements in the Federal Reserve Bank of Philadelphia’s state coincident indexes in March were generally muted. In the one-month changes, West Virginia led with a 1.12 percent gain, with North Dakota the only other state with an increase above .5 percent. Five states were down, but Hawaii’s .62 percent drop was the only one larger than .10 percent. Over the three months ending in March, while nine states were down, Hawaii was again the only one with a drop of as much as .5 percent. North Dakota, Indiana, and New Jersey were the only states seeing gains of 1 percent or more. Over the last twelve months, four states were down—West Virginia, which has clearly been quite volatile recently, was off 3.42 percent, but no other fell as much as half that. No state had an increase higher than four percent, and only three were higher than three percent.

The independently estimated national estimates of growth over the last three and twelve months were, respectively, .50 and 1.76 percent. Both measures appear to be fairly consistent with the state numbers.

India’s economic performance in 2025 exceeded expectations across the board. During our recent visit to Mumbai, nearly all contacts expressed surprise at the economy’s resilience. Despite the disruption from Trump’s tariff measures—under which Indian exports faced duties of up to 50% until an interim agreement was reached in February 2026—India still expanded by 7.6% in 2025, an improvement on 7.1% in 2024.

Growth did soften marginally in the final quarter, easing to 7.8% YoY from 8.3% YoY, largely due to weaker net exports. However, the more important takeaway for a domestically driven economy is that private demand strengthened (Figure 1). Consumption-led growth remained robust, and while export growth slowed, import volumes—a leading indicator of domestic demand—picked up significantly.

The Congressional Budget Office (CBO) projects large federal budget deficits, in absolute as well as relative terms, as far as the eye can see. This, by definition, means continued increases in the federal debt, again in both absolute and relative terms. The CBO forecasts that the levels of interest rates across the maturity spectrum over the next 10 years will be approximately where they are currently. My “forecast” is that the levels of interest rates, especially in the longer maturities will be higher than the CBO’s forecast. Be that as it may, the CBO projects that net interest on the federal debt will rise inexorably over the next 10 years. Given that Social Security, Medicare, Medicaid and defense expenditures are projected to dominate federal outlays excluding interest on the debt, there is little room for the federal government to slow the growth in federal spending without precipitating a walker-aided march on Washington, DC. By the way, it is projected by the Social Security Administration that its “trust” fund for old-age benefits will be exhausted by 2036. This means that all else the same, benefit payments to then current recipients will have to be cut. Do you really think “all else will be the same”? I think there will be a change in the law allowing the Treasury to borrow more to allow Social Security to maintain its “promised” benefits. Increasing taxes in a meaningful way appears to be politically unfeasible. Under these circumstances, I believe that the federal government, with “cooperation” from the Federal Reserve will attempt to inflate away its federal debt/debt-servicing challenges. It will do this by the Treasury purposely shortening the maturity structure of the federal debt and inducing the Federal Reserve, which dominates the level of short-maturity interest rates, to maintain the federal funds rate at a below-equilibrium level. This will result in a steepening in the yield curve, with the level of longer-maturity interest rates increasing relative to the federal funds rate as well in absolute terms. This will be accompanied by faster growth in the credit created by the Federal Reserve and the depository institution system, i.e., credit created, figuratively, out of thin-air (drink). In turn, this faster growth in “thin-air” credit will result in higher inflation.

Plotted in Chart 1 are fiscal-year observations of federal budget deficits (-)/surpluses (+) in absolute terms (blue line) and relative to nominal GDP (red bars). Historical data run from FY 1965 through FY 2025 and CBO projections are from FY 2026 through FY 2036. By FY 2036, the CBO projects that the federal budget deficit will be $3.1 trillion, compared with $1.8 trillion in FY 2025. As a percent of GDP, CBO projects the budget deficit in FY 2036 to be -6.7% compared with a median of -3.0% for fiscal years 1965 through 2025.