Battling the Dual Mandate

by: Kenneth J. Entenmann CFA®, June 12, 2026

Over the past several days, we’ve received a substantial amount of economic data that will likely shape expectations heading into next week’s Federal Open Market Committee meeting. The Fed convenes Tuesday and Wednesday, with its interest rate decision scheduled for 2 p.m. on June 17. Based on the latest information, the data paints a picture that can best be described as surprisingly strong.

The U.S. economy continues to demonstrate impressive resilience, even in the face of ongoing geopolitical tensions in the Middle East. Recent Bank of America credit card data shows that consumer spending, excluding gasoline, rose 4.5% over the past month. Perhaps more importantly, that growth was broad-based, spanning all income levels. This indicates that the strength in consumer activity is not isolated but rather widely supported.

Manufacturing data reinforces this positive outlook. The latest ISM manufacturing report points to strong activity, with expanding new orders suggesting continued momentum. Taken together, these indicators suggest the economy is growing at a healthy and sustainable pace.

Last week’s labor report further confirms the economy’s underlying strength. The U.S. added 172,000 jobs, far exceeding expectations, while the unemployment rate held steady at 4.3%. Recent months payroll numbers have been revised upward. Over the past three months, job creation has surpassed 500,000 positions. Despite lingering concerns of an AI jobs apocalypse, the labor environment remains robust and supportive of continued economic expansion. Here in Syracuse, Micron recently announced there will be 3,000 construction workers on their new Fabrication plant site in 2027. The AI buildout is real!

However, inflation data remains “elevated” (the Fed’s term) but explained. The data released in recent days shows core CPI rising 2.9% year-over-year, slightly above the Federal Reserve’s 2% target but still within a manageable range, given the current geopolitical environment. Core PPI, however, increased 5.1% over the same period.

A closer look, not surprisingly, reveals that much of this upward pressure is concentrated in one area: energy. Roughly 80% of the recent increase in inflation can be attributed to higher energy prices, which are closely tied to geopolitical tensions in the Middle East. On the other hand, past inflation catalysts such as shelter and auto insurance are showing signs of improvement. While inflation remains somewhat elevated, the drivers appear specific and not broadly systemic. If (and it is a big IF!) the Middle East conflict can be resolved in a reasonable time and manner, inflation will likely improve materially.

Given this backdrop, the path forward for the Federal Reserve is becoming clearer. Recall the Fed has a dual mandate: maximize employment and price stability. The belief that the economy was weakening, and AI was eroding the labor market was driving expectations that the Fed would act on its employment mandate. The Fed’s next move would be an interest rate cut, maybe even more than one. The strong economic growth and resilient labor market no longer provide the Fed the “excuse” to cut rates. Its employment mandate does not need the help.

Meanwhile, it is becoming difficult to ignore inflation, as it remains significantly above the Fed’s 2% target. The recent data point toward a pause in policy changes. Any potential for rate cuts appears to have diminished significantly. Instead, the Fed is likely to remain on hold at next week’s meeting and potentially for the foreseeable future as it continues to balance its dual mandate of price stability and maximum employment. Indeed, do we dare suggest that the Fed’s next move could be a rate hike!

The equity markets are disappointed that rate cuts appear to be off the table. The NASDAQ responded to the employment data with a near 5% one day sell-off. Is this the end of the AI Bull market? Is there an AI bubble that is finally bursting?

Certainly, the equity markets have been on a three-year run and valuations in certain sectors are undeniably elevated. However, there are broader structural forces at work that help explain rising equity prices.

First, consider the demand side for equities. Over the past 15 to 20 years, there has been a fundamental shift from defined benefit plans to defined contribution plans such as 401(k)s. Participants in these plans are more inclined to invest heavily in equities compared to traditional pension structures, which typically maintained larger allocations to fixed income. The ongoing growth of 401(k) assets has created a steady and increasing flow of capital into the stock market. This structural shift continues to support equity demand.

In addition, leverage has become more prevalent. The growth of exchange-traded funds, particularly those offering leveraged exposure, has enabled investors to amplify their positions, sometimes by two or three times. This trend is particularly noticeable among younger investors and further increases demand for equities. It may also create increased volatility!

Government policy is also playing a role in the creation of new accounts designed to encourage retirement and college savings. This includes proposals for new tax-advantaged accounts for independent workers and new “Trump Accounts” for children that will be subsidized by the government and philanthropy. The result is additional demand for financial assets.

On the supply side, there are fewer publicly traded companies available today than there were a decade ago. Mergers and acquisitions have reduced the overall number of public firms, and the pace of new initial public offerings has been relatively modest.

While there is potential for high-profile companies such as SpaceX, Anthropic, and OpenAI to enter the public markets soon, the current supply of new equities remains limited. This imbalance between growing demand and constrained supply is an important factor supporting higher valuations.

While certain segments of the market may appear stretched, particularly those tied to emerging technologies, the broader trend in equity prices is supported by powerful structural forces. At the same time, the economic data continues to reflect strength and resilience, reducing the urgency for the Federal Reserve to adjust policy in the near term.

As we head into next week’s Fed meeting, the most likely outcome is a continuation of the current stance: steady rates, close monitoring of inflation, and a careful eye on both economic growth and global developments.