Fed rate cut bets fade as inflation sticks around

The narrative of an imminent Fed pivot is collapsing under the weight of sticky inflationThe rate at which prices rise across an economy.. Earlier this year, traders had priced in aggressive rate cuts starting in the second half of 2025; that assumption is now under assault. The April CPI print came in hotter than expected across headline and core measures, with energy and food costs elevated by Middle East supply disruptions. Morgan Stanley's Chief US Economist now expects inflation to peak in May or June, implying stickiness through mid-year. Goldman Sachs has signalled that dollar strength and elevated yields will persist as the energy shock keeps real rates high.

Treasury markets are experiencing a sharp repricing. Bond bears have reloaded bearish bets, lifting expectations for Federal Reserve rate hikes rather than cuts. This reversal is forcing traders to recalibrate 2026 terminal rate expectations upward. Japan's RBI and other central banks are similarly tightening bias, with some analysts questioning whether cuts happen at all. Warsh's potential role as Fed chair (if confirmed) adds uncertainty; some market participants believe his inflationThe rate at which prices rise across an economy.-hawkish stance will keep policy restrictive longer. Meanwhile, junk-rated firms are rushing to refinance debt while windows remain open, sensing that borrowing costs could rise materially.

Equity markets are reacting with volatility. Tech stocks, which benefited from low-rate assumptions, have cooled as valuations collide with sticky inflationThe rate at which prices rise across an economy.. The Nasdaq and growth-heavy indices saw sharp selloffs, with chip stocks down on momentumThe empirical fact that winners keep winning over the medium term. but also on recognition that rate cuts are further away. Broadcom (AVGO), Nvidia (NVDA), and Tesla (TSLA) all experienced pressure as rate expectations shifted. The Russell 2000 and broader small-cap space have underperformed, reflecting higher real discount rates. Consumer discretionary also struggles as rising real rates erode purchasing power.

The bulls counter that energy shocks are typically transient and that the Fed will eventually pivot once inflationThe rate at which prices rise across an economy. moderates. Some market commentators argue that recent weakness is overdone and that a summer slowdown in inflation data could re-ignite rate-cut optimism. However, the consensus is shifting toward a "higher for longer" regime, challenging the bull case for equities and favoring defensive positioning.