Monthly Interest Rate Update
With Fed leadership in transition, markets are recalibrating rate expectations. Treasury yields have moved higher as inflation pressures persist—driven in part by rising energy costs and global conflict—while the yield curve continues to flatten. In this environment, rates are likely to remain volatile, making a cautious approach and thoughtful interest‑rate hedging especially important.
Kevin Warsh is poised for confirmation by the full Senate to replace Jay Powell as Chair of the Federal Reserve. The Justice Department dropped its legal investigation into Powell last month, clearing the way for Warsh to take office on May 15. The case was widely seen as a pretext to browbeat the Fed into dramatically cutting rates, even though inflation has been running hotter than target for the past five years. However, the threat that it may be reopened has prompted Powell to remain in his position as a voting member of the FOMC (Federal Open Market Committee) until 2028 when his term as a Board Governor ends, even as he steps aside as chair.
The FOMC kept rates unchanged at its April 29 meeting, while leaving the door open for a possible rate hike by year-end. Futures markets are currently pricing in an 87% chance that the Fed’s short-term benchmark rate will be unchanged or higher by December, with only a 9% chance of a cut in the next 12 months. As a result of this shift in market opinion, Treasury yields have crept up 10 to 15 basis points in the past five weeks, continuing their upward trajectory since the start of the war between the United States and Iran. Five-year yields have now breached the 4.0% mark.
The White House announced the end of offensive operations in the Persian Gulf, shifting attention toward efforts to reopen the Strait of Hormuz to tanker traffic. There are estimated to be more than 1,550 commercial vessels still bottlenecked in the strait, constraining global oil supply and pushing Brent crude to $111 a barrel. Even if all goes smoothly, it will likely take months for higher energy costs to work their way through the economy beyond the gas pump—and longer still for shipping traffic and oil prices to return to prewar levels.
With this as backdrop, the CPI (Consumer Price Index) is now up 3.3% year-over-year, well above the Fed’s 2.0% inflation target. According to U.S. inflation swaps, annual inflation expectations for the next two years have moved meaningfully higher, rising from 2.3% to 3.1%.
As a new Fed Chair navigating this complicated environment, Warsh may struggle to build consensus for looser monetary policy. In fact, he has already begun painting himself in a corner by prematurely advocating for rate cuts based on an assumption that AI-driven improvements in productivity will tamp down future inflation. While this may be true in the long run, it will take time for the economy to adapt to the new technology, especially since the flip side of higher productivity is lower demand for labor. It’s notable that Warsh, in 20 years as a monetary policy specialist, has had little to say about the “maximum employment” half of the Fed’s dual mandate. In contrast to previous chairs like Janet Yellen, who was a labor economist before entering government service, Warsh will have to compensate for this blind spot in his background as he leads the central bank in the post-Powell AI era.
The rate outlook over the next year has shifted upward since February. Markets now expect modest increases in both short- and long-term rates, with the front of the curve moving up faster than the back end. Overall, the yield curve has flattened by about 20 basis points but remains positively sloped. This reflects a combination of higher inflation, continued economic resilience and a labor market that has cooled but is not recessionary. As a result, rates are likely to remain range-bound for now. However, tariffs, geopolitical turmoil, higher energy prices and any other unknowns waiting for us have the potential to push rates out of the range in either direction. We continue to recommend proceeding cautiously, hedging your interest rates as needed to protect against surprises.
Key Statistics: Interest Rates, Unemployment and Inflation
| Year-end 2022 | Year-end 2023 | Year-end 2024 | Year-end 2025 | April 30, 2026 | |
|---|---|---|---|---|---|
| 10-yr Treasury yield | 3.87% | 3.88% | 4.57% | 4.17% | 4.37% |
| 2-yr Treasury yield | 4.43% | 4.25% | 4.24% | 3.47% | 3.87% |
| Spread | -0.56% | -0.37% | 0.33% | 0.70% | 0.50% |
| Fed Funds Target (mid) | 4.375% | 5.375% | 4.375% | 3.625% | 3.625% |
| CME Term SOFR 1-mo | 4.36% | 5.35% | 4.33% | 3.69% | 3.66% |
| CPI (y/y change) | 6.5% | 3.1% | 2.7% | 2.7% | 3.3% |
| Core PCE (monthly) | 4.7% | 3.16% | 2.81% | 2.83% | 3.2% |
| 5-yr TIPS (market breakeven) | 2.38% | 2.15% | 2.39% | 2.27% | 2.66% |
| U-3 Unemployment | 3.5% | 3.7% | 4.1% | 4.4% | 4.3% |
| Real avg weekly earnings | -3.1% | 0.5% | 1.0% | 1.1% | 0.2% |
| Annual change in NFP jobs | +4,503,000 | +2,560,000 | +1,450,000 | +371,000 | +139,000 |
U.S. Treasury Yield Curve
Today vs. 3m and 1Y Ago
Source: Bloomberg Finance LP
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We’ve seen a parallel upward shift in the yield curve vs. 3 months and one year ago. The five-year yield is up 25 bp since February, and +10 bp in the past year.
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The shape of the front end of the curve has changed more significantly, reflecting actual and expected Fed rate cuts over the past year.
Market Inflation Expectations Highest in Three Years
Source: Bloomberg Finance LP
Federal Reserve Chair Relative Performance
- Under Powell’s chairmanship, inflation averaged 3.5% and job growth was 112,000 per month. This puts the last eight years at the top of the inflation range and job growth in the middle.
- On these same metrics, Yellen had the best performance in her 4-year tenure, with both strong job growth and low inflation.
- A more nuanced analysis would give a more complete picture, as each chair had to deal with distinct economic challenges.
Associated Bank offers a wide range of instruments for hedging interest rate, commodity and foreign currency risk, including foreign exchange in more than 75 currencies. Companies interested in learning more about these instruments should contact their Associated Bank Relationship Banker or the bank’s Capital Markets Department at 866-524-8836.
All rates shown are indications only and subject to change.
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