High Hopes
Brandon Urie, lead singer for early 2000s band Panic! at the Disco, proved clairvoyant in “High Hopes.” Urie sang: “Don’t give up, it’s a little complicated, all tied up, no more love and I’d hate to see you waiting”—a fitting description of markets waiting, impatiently, for the Fed to move amid stubborn inflation and geopolitical upheaval.
Volatility picked up in the stock market last week. Investors grappled with the on-again, off-again talks over the war in the Middle East, amid a backdrop of eye-watering gains in oil and equity prices. Somewhat overshadowing the war and rising prices, though, was another noteworthy increase: that of the Consumer Price Index.
The CPI climbed 0.5% from April and 4.2% from a year earlier, the most since early 2023 (Figure 1), according to the Bureau of Labor Statistics. More than half of the advance in the overall CPI was due to higher energy costs. However, a slight correction in stock prices, coupled with a little hysteria from stock investors, won’t move the needle for the Federal Reserve to cut rates—certainly not in the face of simmering inflationary pressures.
Following the release of the CPI, Nick Timiraos of the Wall Street Journal wrote that “for the Fed, May’s inflation report settles nothing.” Timiraos’ implication: While underlying indices like the core inflation figure rose by only 0.21% on the month, soft monthly prints no longer carry the weight for dovish Fed policymakers that they would have at the beginning of 2026.
In today’s market, the tepid core figure was overshadowed by another hot headline number that was driven by surging energy costs. The case for patience likely now depends on multiple cooler reports, rather than on any single one, which leaves the Fed’s recent hawkish surge intact heading into this week’s meeting of the FOMC.
The main quandary now is whether the disinflation that the FOMC has anticipated in order to lower rates will ever arrive—and, what to do if it doesn’t. Inflation expectations, for their part, remain anchored and elevated. For example, Friday’s release of the University of Michigan sentiment surveys suggested that consumers expect prices to rise at an annual rate of 4.6% over the next year, down from 4.8% in May (Figure 2). Survey respondents also saw costs rising at an annual rate of 3.4% over the next five to 10 years, erasing the prior month’s jump.
Recall that thGiven the recent surge in pricing pressures, the debate has shifted toward holding rates steady, or potentially increasing rates. As noted in last week’s Talking Points, that’s a conversation that seemed unthinkable when the year began with markets pricing in cuts.
While last week was quiet due to the customary blackout period ahead of Fed meetings, we can point to some hawkish-building consensus ahead of the quiet time. For instance, future host of Super Bowl LXI champs and Cleveland Fed President Beth Hammack said in a statement last Friday that it’s reasonable to hold rates steady at the moment, “but if recent trends continue, it may soon be appropriate to act.” Which suggests she may be prepared to back a rate increase at the July meeting. A second FOMC voter, Dallas Fed President Lorie Logan, also indicated that she would support a rate increase later this year if current conditions persist.
The hawkish shift and worsening economic data (from an easing point of view) couldn’t come at a more inconvenient time for Kevin Warsh, who will host his first FOMC meeting as Fed Chair. As widely reported, the White House has been ratcheting up pressure on monetary policy officials to provide more accommodation. But Warsh seems to have inherited data that may force him to build a consensus for tightening.
Meanwhile, Trump’s top economic adviser moved to head off the Fed’s hawkish turn. The hiring upswing isn’t a textbook case “where you need to hike rates,” insisted Kevin Hassett, director of the White House National Economic Council. Hassett made the case for more accommodation and stated that the Fed “will have room, as it watches the numbers, to cut rates.” Hassett also argued that the May jobs report showed an economy that’s growing because its productive capacity is expanding, not because demand is running too hot. “This is a supply-side job number, which means you can have growth and low inflation.”
Some of this higher growth, without the typical demand-side inflationary forces, may indeed be due to the AI boom, which is seen as increasing productivity at a lower cost of production. Nevertheless, inflationary figures remain above the target of the Fed—so Hassett’s pleas will likely fall on deaf ears for now.
It is well known that President Trump installed Warsh with the expectation of lower rates. Still, at Warsh’s swearing-in ceremony three weeks ago, the president said he wanted the new chair to be “totally independent.” Yet just hours later at a rally, Trump declared: “You get the interest rates down, everybody’s going to be very, very happy.” Later in the week, Trump again tried to have it both ways. “I’m going to let Kevin [Warsh] make that decision,” said the president. “[But] I’d like to see lower interest rates.”
Given the current backdrop, it seems very difficult for the FOMC to do anything but remain on the patient/hawkish side. The mortgage banking community will surely side with Hassett and Trump in hoping for accommodation. But, as U.S. General Gordon Sullivan famously said, hope is not a strategy.
FROM THE DESK
Agency CMBS — DUS tightened last week on stronger demand and lower supply. Ginnie Mae project loans held in, largely on still tepid supply and optimism in the REMIC space. The macro story in both of these markets remains intact. No major changes.
Municipals — AAA tax-exempt yields moved higher across the curve, week over week, as the market absorbed another heavy slate of issuance. Deals continued to clear, supported by steady inflows and reinvestment demand, though repricing was more modest, signaling a slight softening in tone. Year-to-date issuance stands near $260 billion, with about 25% from non-traditional sectors (such as hospitals and housing). Fund flows remained positive at $625 million, though high-yield demand was more subdued, with just $12 million of inflows.
The information contained herein, including any expression of opinion, has been obtained from, or is based upon, resources believed to be reliable, but is not guaranteed as to accuracy or completeness. This is not intended to be an offer to buy or sell or a solicitation of an offer to buy or sell securities, if any referred to herein. Lument Securities, LLC may from time to time have a position in one or more of any securities mentioned herein. Lument Securities, LLC or one of its affiliates may from time to time perform investment banking or other business for any company mentioned.
