The market "added one interest rate cut" for him! Powell took office on Friday, and the interest rate cut path for the year has been cut off: US Treasury yields surged across the board.

On May 22nd (Friday), Kevin Wash will be sworn in as the 17th Chairman of the Federal Reserve at a ceremony held at the White House and hosted by President Trump himself. The last time a Federal Reserve Chairman was sworn in at the White House was in 1987 by Alan Greenspan - breaking nearly 40 years of tradition, this arrangement not only reflects Trump's importance to Wash, but also subtly casts a shadow of "presidential supervision" over the inauguration. However, on the eve of the swearing-in ceremony, a much harsher "examiner" had already sent a signal to Wash. In the past week, the US Treasury market, with a scale of about $30 trillion, has experienced a systematic repricing - the 30-year US Treasury bond yield surpassed 5% and briefly touched 5.16%, reaching the highest level since the eve of the 2007 global financial crisis; the 10-year yield stood at 4.5%; and the most policy-sensitive 2-year yield broke through the upper bound of the Fed's current policy rate target range of 3.50%-3.75%, rising to over 4%. Before Wash has even chaired his first FOMC meeting, the bond market has already given him a "rate hike". Wash's Dilemma This is not a mild welcome ceremony, but a baptism by fire for his inauguration. To understand the situation Wash is facing, one must first understand the cruel signals that current market pricing conveys. Market "pressure": The return of the bond vigilantes The 2-year US Treasury bond yield surpassing the upper bound of the Fed's policy rate range is an extremely rare anomaly. Normally, the 2-year yield won't sustainably exceed the federal fund rate target range - because this implies that the market believes the current policy rate level is insufficient to contain inflation, and that the Fed must be forced to tighten monetary policy. In the words of Wisdom Fixed Income portfolio manager Vincent An, "Wash originally hoped to cut rates on his first day in office, but the bond market directly cut off that possibility. This is the modern 'bond vigilantes'. They don't rely on a surge in yields to undermine the Fed's credibility, but by pushing the entire yield curve above the policy range, they deprive it of the option to cut rates." The revival of the term "bond vigilantes" is no accident. Ed Yardeni, the veteran strategist who coined the term, recently issued a warning: Wash may be forced to switch to rate hikes at the July FOMC meeting to establish policy credibility and soothe the bond market. "Wash will chair the June FOMC meeting, but who really controls monetary policy? We believe it's the bond vigilantes." Yardeni wrote, "He will likely eventually bend and join the tightening camp." Market data confirms this assessment. The CME FedWatch tool shows that the market expects a nearly 40% probability of a 25 basis point rate hike by the Fed in early December, while the probability of a rate cut is less than 2%. Initially, when Wash was nominated for the Fed chairmanship in January, the market expected multiple rate cuts throughout the year; now, this expectation has been completely reversed. Futures markets have completely ruled out the possibility of rate cuts in 2026. Goldman Sachs further notes that US Treasury yields are putting sustained "mandatory rate hikes" pressure on the Fed, and interest rate futures have systematically priced in the possibility of Fed rate increases. As Fannie Mae Americas Research Director Subudra Rajappa pointed out sharply - "Rising yields may not be an intentional challenge to the incoming Fed chairman, but it undoubtedly makes his job more difficult. Wash joins the fray just as inflation is rising, and his dovish tendencies may be challenged." Inflation: From "Transitory" to "Systemic" Transformation The first engine driving this bond market storm is the fundamental deterioration of the inflation situation. The latest data shows that in April, US CPI rose by 3.8% year-on-year, hitting a new high since May 2023; Core CPI rose by 2.8% year-on-year, the highest since September 2025. PPI rose by 6%, significantly exceeding market expectations of 4.8%. The most favored PCE indicator by the Fed also does not look optimistic - core PCE rose by 3.2% year-on-year in March, the highest since November 2023; overall PCE increased by 3.5% year-on-year. The latest reading from the Philadelphia Fed's quarterly professional forecast survey is even more alarming: the overall CPI inflation expectation for the second quarter has been raised to 6%, compared to 2.7% just three months ago. A survey of fund managers from Bank of America in May also shows that 62% of respondents expect the 30-year Treasury bond yield to rise above 6%. The drivers of inflation are not limited to a single dimension. The soaring oil prices caused by the Iran war are of course a core variable - the average gas price in the US has already exceeded $4.50 per gallon, and diesel prices have reached $5.65 per gallon. But what worries the Fed more is that price pressures are spreading beyond the energy sector. Boston Fed President Collins warned that if inflation pressures fail to ease, the Fed may need to raise rates again; Chicago Fed President Goolsby bluntly stated, "Inflation is moving in the wrong direction, and this wrong direction is not just reflected in the oil-related aspects." This is the core dilemma facing Wash. When he was nominated as the Fed Chair candidate in January and during the Senate confirmation hearing in April, he repeatedly argued a point: current inflation is mainly driven by temporary factors, and once the Iran situation eases, combined with the productivity growth brought on by AI, price pressures will gradually ease. He even hinted that the Fed should consider changing the inflation measurement index. But with the April inflation data exceeding expectations across the board and core inflation stubbornly not decreasing, the persuasiveness of this argument has greatly diminished. Former Cleveland Fed President Mester's assessment hits the mark, "At this critical moment, he cannot convincingly put forward those arguments, as we face a significant inflation challenge." Julia Coronado, founder of MacroPolicy Perspectives and former Fed economist, is even more stern in her judgment: "You can't find any factors that truly curb inflation, and wars exacerbate fiscal woes, as we need to finance the war. The path to rate cuts will inevitably lead to an economic downturn." Fiscal dilemma: The "Death Spiral" of Debt and Interest Rates Apart from inflation, another force quietly reshaping market logic is the structural deterioration of the US federal fiscal situation. As of May 2026, the total US federal debt has approached $39 trillion, accounting for approximately 135% of GDP. The federal deficit for the 2026 fiscal year is expected to reach $1.9 trillion, or 5.8% of GDP. Even more astonishing is the interest expense - the net interest expense for the 2026 fiscal year is already at $1.23 trillion annually, surpassing defense spending (approximately $917 billion) for the first time in modern history, ranking only behind social security in the federal budget. A dangerous vicious cycle is forming between debt and interest rates. As interest rates rise, government refinancing costs increase, deficits widen, the Treasury has to issue more bonds, further driving up yields. This is what analysts call the "debt- pay-interest-deficits-expand-reissue-debt'' negative feedback loop. On May 13th, the US Treasury completed an auction of $250 billion in 30-year bonds, with a bid rate as high as 5.046% - this is the first time the US government has issued 30-year bonds at more than 5% since 2007. Compared to 2007: at that time, federal debt was only about $9 trillion, and interest payments accounted for less than 10% of federal revenue; today, with debt approaching $40 trillion, interest accounts for nearly 20% of revenue. This fiscal difficulty directly constrains Wash's "asset shrinkage" ambitions. Wash has long criticized the Fed's balance sheet for being too large, advocating for a gradual reduction from its current approximately $6.7 trillion, returning to a more traditional monetary policy framework. But in a high debt environment, if the Fed were to substantially sell off treasuries, this would further push up long-term yields, exacerbate government financing pressures, and could also trigger bond market turmoil. Stanford University finance professor Hanno Rastig pointed out that if the Fed stops intervening and lets the market achieve true price discovery, US Treasuries may expose their lost "convenience yield" - the rate discount that the market gives to risk-free assets. Reuters' commentary is incisive: Wash's balance sheet reduction plan is facing a "double squeeze of rising federal debt and declining attractiveness of US Treasuries." "Internal Struggle" Dilemma: When a Dovish Chairman meets a Hawkish Committee More challenging than market pressures is the structural isolation Wash faces within the FOMC. As one of the 12 voting members, Wash only has one vote, meaning that any attempt to push for rate cuts would need to persuade the majority of the committee. And at the current juncture, this is nearly an impossible task. At the last FOMC meeting held at the end of Powell's tenure, rare divisions erupted within the committee. Three regional Fed presidents - Hamaak from Cleveland, Logan from Dallas, and Kashkari from Minneapolis - voted against the policy statement, not because of the rate decision itself, but because the statement retained the language hinting at a further rate cut in the future. They made it clear that, in the current context of the Iran war causing an oil price surge, and widespread inflation pressures still existing, the Fed should not signal any hint of further rate cuts. Along with dovish Council member Stephen Milan's consistent advocacy for immediate rate cuts, the four dissenting votes set a record high since 1992. This is just the beginning. On the eve of Wash's inauguration, the hawkish forces within the FOMC are gathering strength. Kashkari has repeatedly stated that "inflation must not become the new norm," emphasizing that the Fed must bring the inflation rate back to its 2% target. Kansas City Fed President Schmid directly called inflation the "most urgent risk" at the moment. Although New York Fed President Williams' stance is relatively moderate - emphasizing that "there is currently no reason to raise or lower rates" - for Wash, this means that even staying put will require him to persuade consensus. Michael Feroli, chief US economist at JPMorgan, put it bluntly: "It seems that people are increasingly convinced that policy will be decided by the committee, not by the new chair imposing a new direction on the Fed. It will be more difficult for him to persuade people to accept a rate cut at any time this year." The only good news is: dovish councilman Milan has officially submitted his resignation in recent days, leaving the Council on Wash's assumption. This means that at least one fewer opposing vote from the hawkish camp, but it also means one less natural ally for the dovish camp. The pressure Wash faces is not only from within the FOMC. While Trump admitted in a recent interview that rising energy prices have complicated the prospect of rate cuts - which the market interpreted as a relaxation of his insistence on rate cuts - he still explicitly stated that Wash and he both "tend to lower rates overall and adopt loose monetary policies." The tension between the White House and the Fed is like a taut string. Insight Investment Management portfolio manager Nate Hyde's judgment speaks to Wash's dilemma: "If you can't get support from the committee and you have to endure pressure from the president, then besides forcing a smile and striving for consensus, you really have no choice." Wash's "Third Way": Feasible Strategies Amid Hopeless Rate Cuts In the midst of nearly impossible rate cuts and uncertain rate hikes, what strategies could Wash and his policy team adopt? Yardeni research has put forward a noteworthy operational path: at the upcoming June FOMC meeting, Wash can push the committee to remove the "loose bias" language from the policy statement, which hints at further rate cuts in the future - i.e. the current statement's "additional adjustments'' - and instead adopt a neutral or balanced wording. This operation may seem "hawkish" on the surface, but it could actually have a clever policy effect: by expressing a firm stance on fighting inflation to suppress long-term inflation expectations and term premiums, thereby lowering long-term borrowing costs - in other words, "achieving the dovish results the White House wants by doing hawkish things." Another detail worth noting is: Wash has long publicly opposed "forward guidance'' policy, believing that the Fed should not commit to rate paths through policy statements. In the current highly unstable inflation expectations and the bond market preemptively pricing, abandoning forward guidance might actually become his advantage - it allows the Fed to retain policy flexibility in any direction of action, avoiding being "held hostage'' by the market. But regardless of the path taken, the time window left for Wash is rapidly narrowing. His first FOMC meeting after assuming office will be held on June 16-17, followed by the July meeting - and the market is already pricing in the possibility of a rate hike in July. Before the inauguration ceremony, the US Treasury yield curve has already "tightened financial conditions'' for him. Just as Liu Jiexiang, senior investment portfolio manager at Invesco Fixed Income, predicted: "The federal rate will overall be in a 'high for longer'' state, meaning high rates will last longer.''