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By: Kathryn Rooney Vera, Managing Director and Chief Market Strategist
From the desk of our senior advisor, Jon Hilsenrath.
Overview:
Two important messages came out of the U.S. central bank this week: 1) President Trump’s push for much lower interest rates is likely to face strong opposition from the central bank after Jerome Powell leaves center stage as Fed chairman on May 15; in fact a case is building at the Fed for rates to go up; 2) More broadly, Kevin Warsh, the prospective new chairman, is inheriting an institution that will fight for independent, consensus-driven decision-making, a potential obstacle to his vision of wholesale “regime change.”
Shifting Rate Outlook: Markets are responding accordingly. Importantly, market expectations for where the Fed will land a year from now have shifted. Two-year Treasury yields are above the current fed funds rate target range. Additionally, futures markets place a greater than 30% probability on the fed funds rate being higher in a year; a week ago, the April 2027 fed funds futures contract traded with just a 0.8% probability of a higher rate in a year.
The outlook is shifting quickly. The market has effectively concluded that the inflation problem is not going away in the near term, that Warsh will defy the president’s longstanding demand for short-term rate cuts, and that the rest of the central bank will agree...
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Commodity inflation has moved from a temporary input into a structural one in sovereign bond pricing, and the U.S. Treasury curve is showing exactly where. The oil correlation now sits at the 10 year point rather than the two year, which changes what an inflation print is actually worth.
Market commentary Interest Rates- Thought Leadership The Reserve Bank of Australia's updated forecasts lowered the bar for an upside inflation surprise while building more labor market weakness into the baseline. With wages, jobs, inflation, growth and spending data all landing before the next policy meeting, the risk sits with front end pricing that still treats a hike as remote.
A single negative payrolls print did more than miss expectations, it reset how far the Federal Reserve is expected to move in 2026. With revisions clouding the data and forward guidance fading, the market is left to price the rate path largely on its own.
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