The Fed is ‘meaningfully deviating’ from one of the most basic rules for fighting inflation, BofA warns

Good morning. On Fortune’s radar today:

- Fed is breaking Econ 101’s golden rule, BofA warns.

- Markets: “Blown past expectations.”

- U.K.’s Starmer clings on as his MPs revolt.

- Iran vows to make U.S. taxpayers feel the pain.

- Tech bloodbath: 118,000 jobs gone in 2026.

- Forget your office ping-pong — meet the Wimbledon of work.

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THE MARKETS

Q1 earnings have “blown past expectations”

- S&P 500 futures were down 0.36% this morning. The index rose 0.19% yesterday to a new record high of 7,412.84.

- In Europe, the Stoxx 600 was down 0.77% in early trading and the U.K.’s FTSE 100 was down 0.54% before lunch.

- Asia: South Korea’s KOSPI lost 2.29%. Japan’s Nikkei 225 was up 0.52%. India’s Nifty 50 declined 1.92%. China’s CSI 300 was flat.

- Brent crude was $107 a barrel this morning, up from a low of $102 yesterday.

- Bitcoin was $80.9K.

Why does the S&P 500 keep hitting new highs even though the world is at war and oil is above $100 per barrel? To misquote former U.K. Prime Minister Harold Macmillan, “Results, dear boy, results.” The index has delivered a blockbuster set of Q1 earnings. With 86% of companies reporting, “64% of companies beat both EPS and sales expectations, nearly 20 percentage points ahead of the historical average of 42% since 2001,” according to Savita Subramanian of Bank of America. The “1Q26 earnings season has blown past expectations,” she said in a note.

It was the sixth straight quarter in which the index has delivered EPS gains of 5% or more, according to Ohsung Kwon and his colleagues at Wells Fargo.

ONE BIG THING

U.K.’s Starmer clings on despite rebellion aimed at forcing him out

In a fast-moving situation that is changing by the minute, U.K. Prime Minister Keir Starmer this morning said he would face down a rebellion from his own members of parliament and stay on in No.10 Downing Street. More than 70 of his Labour party MPs have demanded he leave office, after their party lost nearly 1,500 seats in local elections last week. However, the party’s rules require 20% of the parliamentary party—81 MPs—to demand his resignation before a leadership election can be forced.

“The Labour Party has a process for challenging a leader and that has not been triggered,” Starmer said this morning. “The country expects us to get on with governing. That is what I am doing and what we must do as a cabinet.”

The number of MPs moving against Starmer has been changing by the minute and it is possible that Starmer may be forced out as soon as today. Alternatively, he may stay on in a gruelling civil war within his own party.

Investors sold U.K. government bonds. The yield on the 30-year “gilt” bond spiked up to over 5.8% on Tuesday, from 5.54% on May 8—a relatively sharp rise in the risk premium. The yield is now the highest it has been for more than 10 years. The pound fell against the dollar, too.

THE ECONOMY

The Fed is “meaningfully deviating from the most standard policy rule,” Bank of America warns

We will get a new readout of U.S. consumer price inflation at 8:30 a.m. New York time today and analysts are guessing the number will be something like 3.7%, up from 3.3% the month before. Crucially, that would place inflation above the Fed’s current base interest rate, 3.5%.

On that basis, Wall Street is waking up to the fact that it is looking less likely that President Trump will get the interest rate cuts he wants from the Fed.

Jerome Powell’s last day as chairman is on Friday, and he will give way to Kevin Warsh. While Warsh hasn’t literally promised a rate cut to Trump, he kinda-sorta didn’t not promise one either. Warsh’s problem is that the data just isn’t shaping up in a way that warrants a cut. Quite the opposite.

Yesterday, the Fed Funds Futures market was pricing a “hold” as a 95.8% probability. If the CPI number comes in hot, expect that to change quickly toward a hike.

Some Wall Street analysts are arguing that a hike is increasingly likely, given that unemployment is modest. Mark Cabana and his team at Bank of America note that the Fed is in danger of ignoring an Economics 101 guideline for fighting inflation: The Taylor rule. This rule states that when inflation is higher than the target rate (which is 2%), the Fed interest rate should be higher still, and moving upward faster than inflation.

But right now the Fed is behind where Taylor says it needs to be. The “Fed is choosing to look through tariff and commodity inflation, expecting both will roll off by late '26. Even if they do fall, standard Taylor still implies a [Fed funds] target of 4.0% at the end of '26. Fed is meaningfully deviating from the most standard policy