Sticky inflation forces Fed rate hike repricing; cuts delayed

The April CPI print delivered a shock to markets expecting disinflation: core inflationThe rate at which prices rise across an economy. accelerated, driven principally by energy costs related to the Iran conflict. Market participants had been pricing in Fed rate cuts starting mid-2026, but the inflation surprise has reversed that narrative entirely. As of May 13, bond markets are now pricing material odds of a Fed rate hike rather than cuts, representing a 180-degree repricing of policy expectations in less than two weeks.

Treasury yields have surged across the curve; the 10-year note has sold off sharply, and 2-year yields have also climbed as traders extend their rate-hold durationBond price sensitivity to interest rate changes. further into 2026. Goldman Sachs sees dollar strength persisting as elevated yields attract foreign capital and geopolitical risk premiums sustain. The Fed's own inflationThe rate at which prices rise across an economy. target and credibility are now in question; core PCE remains sticky, and energy shocks have broadened into broader goods and service inflation.

Equity valuations are under pressure as a result. The S&P 500 and Nasdaq both fell on May 13 as energy and inflationThe rate at which prices rise across an economy. data triggered a repricing of growth expectations and terminal rates. Tech stocks, which had benefited from low-rate assumptions, are particularly vulnerable; Nvidia, Tesla, and other high-multiple names are correcting. Financial stocks are benefiting from higher rate regimes, but banks face deposit and lending margin uncertainty in a rising-rate environment.

Skeptics argue that Trump may downplay the inflationThe rate at which prices rise across an economy. risk and push for fiscal stimulus or pressure the Fed to stay dovish, creating policy friction. Others warn that the Iran conflict is transitory and oil prices could fall sharply, relieving inflation pressure. A swift resolution to Middle East hostilities or breakthrough on US-China trade would reset inflation expectations lower. Conversely, if oil stays elevated and wage pressures persist, the Fed could be forced to hike rates into weakening growth, a classic stagflation scenario.