The June reading placed the economy in the upper-right, stagflation quadrant. This dispatch asks the next question. Given where the economy sits and what the administration is doing, where does the framework expect the rest of the term to go? The answer is a set of branches, not a point, and it is offered as a conditional reading rather than a forecast.
Where the term starts from
Inflation is running well above target on a tariff-plus-energy push, with the import surcharge layered under an energy shock from the conflict with Iran. The tariffs amount to the largest United States tax increase as a share of output in a generation. The Federal Reserve, now chaired by Kevin Warsh, sits in the exact bind the framework dwells on: a majority of its own committee has signaled it may need to raise rates if inflation does not cool, while the administration presses publicly for cuts. Long rates are elevated and stubborn, mortgage and ten-year Treasury rates running well above where they would sit without the agenda. Consumer spending is soft, real incomes are squeezed, and the politics are already turning against the incumbent. That is the board as the term's second half begins.
The base case: a slow stagflationary grind
The framework assigns the most weight to a prolonged sit in the upper-right quadrant rather than a dramatic break. Its first law is that the master scarcity cannot be abolished, only relocated, and that is what the bond market is doing: every attempt to suppress money's scarcity at the short end, through a compliant Fed and more fiscal stimulus, resurfaces as a premium at the long end. Expect inflation that proves stubborn rather than transitory, real incomes under pressure, weak growth, and the credit-coupled goods, housing and automobiles, as the first visible stress, because their demand is a demand for credit and the credit is dear. A backdrop like that tends to punish the governing party, so the framework reads the path through the midterms and into 2027 and 2028 as one of mounting political pressure and a weaker hand on policy.
The hinge: Fed independence
One variable decides which way the grind breaks. If the chair holds the line and keeps policy tight enough to defend the dollar, the likely path is the manageable grind above: painful, slow, survivable. If the Fed cuts into the inflation under political pressure, the framework reads that as pulling the trigger on the worse branch. Easing to relieve the short end while goods-side costs are still rising does not bring relief; it drives the long end and the currency and delivers a sharper inflation leg and the return of the bond vigilantes. The framework does not predict which choice will be made. It only insists that this choice, more than any data print, is the fork.
The left tail: a Minsky moment meeting a spent manager
The real danger is not the grind but a financial trigger arriving while the manager's credibility has already been drawn down. A credit event, a failed Treasury auction, a deepening of the energy shock: any of these could force a dash for cash at a moment when the central bank has been politically blunted. That is the no-clean-exit bind. Flooding liquidity to stop the panic spooks an already-nervous bond market and currency; withholding it lets the descent complete into a real contraction. The longer such a state is mismanaged, the more the counterfeit shortage hardens, through capacity destruction, into a real one. This branch is less likely than the grind, but the framework holds that the policy mix has made its tail fatter than normal, because the rescue instrument is being spent in advance.
The right tail: the bet pays off
Honesty requires the benign branch, and the treatise's own supply-side objection insists on it. If the energy shock fades, if the tariff effect proves a one-time bump in the price level rather than embedded inflation, and if the tax cuts and deregulation genuinely raise the economy's capacity to produce, then disinflationary growth into 2027 and 2028 is possible and the administration's wager pays off. A tax cut is a change in the incentive to produce, not only a demand injection, and an energy shock has a supply remedy. A purely demand-side reading understates this path. It turns on the same two things the grind turns on: the energy shock fading and the Fed holding.
The weighted verdict, and the watch-list
Most likely: a stagflationary grind through the next year and a half, with the credit-coupled goods softening first and the long end of the bond market as the truth-teller. The best single predictor of which way it breaks from there is Fed independence. Hold, and the path stays manageable or drifts toward the benign branch. Cut under pressure, and it tilts toward the inflation burst and the fatter left tail. The indicators worth watching, in order:
- Core inflation. The tell for whether the energy and tariff push is a one-time bump or is becoming embedded.
- The term premium. The long end is where a suppressed scarcity reappears. A steepening here is the bond market sending the bill.
- Fed independence. Whether the chair cuts under pressure or holds. This is the hinge.
- Housing and autos. The canaries. Softening here is the descent beginning, visible before it reaches the cash economy.
- The dollar. The last place a relocated scarcity goes, and the first sign that debasement fears are winning.
As of 15 June 2026. A conditional reading through one framework, about direction rather than magnitude, over a horizon long enough that no one should claim precision. The framework's own objections section concedes that money is not always the binding scarcity; a supply-side reading of the same facts is coherent and may prove closer to the mark. Not a forecast, and not investment advice.