Summary:
Trump has once again pressured the Federal Reserve to cut rates, criticizing Chair Jerome Powell as “always too late” and calling for immediate easing.
Geopolitical tensions have pushed oil prices higher, with the Middle East conflict sending crude briefly close to or above US$100.
Inflation pressure remains in place, as higher energy prices could once again push inflation upward.
Market expectations for rate cuts have declined, with traders no longer viewing even one cut in 2026 as a certainty.
Rate expectations have tightened, and the market is currently pricing in only about 24 basis points of cuts this year.
U.S. Treasury yields have moved higher, with the 2-year yield rising sharply and the 10-year yield approaching 4.27%.
This leaves policymakers facing a dilemma: recession risks may eventually force the Fed to cut rates.
Comment:
Even though inflation has still not returned to the Federal Reserve’s 2% target, there is still a chance that the U.S. could cut rates later this year. The reason is that monetary policy often has to strike a balance between inflation and economic growth. When pressure in the economy or financial markets begins to build, policymakers often choose to ease moderately in order to avoid an excessive contraction.
However, from a longer-term structural perspective, America’s inflation problem may not easily return to the low-inflation environment of the past decade or more. Factors such as supply chain restructuring, the energy transition, geopolitics, and fiscal deficits may all keep inflation at a higher level. For that reason, I believe that 10-year U.S. Treasury yields staying above 4% over the long term may become the new normal.
In this kind of environment, there is really only one scenario that could push inflation down meaningfully: a recession. But recession usually implies collapsing demand, and possibly even a financial crisis — outcomes that neither markets nor policymakers want to see.
In other words, for some time ahead, the stock market may not only struggle to find upward momentum, but could also face further downside. The global economy may have to search for a difficult balance between slightly higher inflation and avoiding deflation.
Disclaimer:
The above content reflects personal views and market discussion only. It does not constitute any investment advice or recommendation to buy or sell. Investing involves risk, and readers should make their own assessments and bear responsibility for their own decisions.