Quarterly Outlook: The Fed Turns Hawkish as Growth Cools

Main Takeaway 

The U.S. economy rebounded from a slow fourth quarter, expanding at a 2.1% annualized rate¹ in Q1. Consumer spending remained resilient despite declining consumer confidence. Meanwhile, tensions in the Middle East continue to pressure energy prices and add to market uncertainty. The labor market remains healthy overall but is showing signs of cooling, with employers adding just 57,000 jobs² in June and the labor force participation rate declining for a second consecutive month.

Top Risks

Stubbornly high inflation (4.2% in May³) has turned the Fed hawkish under new chair Kevin Warsh, raising the threat of rate hikes rather than cuts, while a fragile Iran ceasefire could reignite oil shocks that simultaneously fuel inflation and drag on growth. Consumer confidence remains near record lows even as spending holds up while a cooling job market adds further cost pressure heading into Q3.

Sources of Stability 

Recent economic data suggest the U.S. economy remains on solid footing heading into the second half of the year. Although having moderated recently, economic growth remains positive while unemployment remains low at 4.2%² and consumer spending has stayed resilient despite weak sentiment. If the fragile Israel-Iran ceasefire holds, lower energy prices could ease inflationary pressures and give the Fed greater flexibility, improving the outlook for both economic growth and inflation as the year progresses.

¹U.S. Bureau of Economic Analysis. “GDP (Third Estimate), Industries, Corporate Profits, State GDP, and State Personal Income, 1st Quarter 2026” June 25, 2026

²U.S. Bureau of Labor Statistics. “Employment Situation Summary” July 2, 2026

³U.S. Bureau of Labor Statistics. “Consumer Price Index Summary” June 10, 2026

³ Atlanta Fed GDPNow estimate as of July 8, 2026

For our latest perspectives on markets and economic conditions, view our Quarterly Outlook report for Q2 2026.

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