Inflation Could Keep Rates Higher for Longer

Added: 2026-05-11

[00:00:00]Welcome back to Morning Trade Live. It's time now for the big picture. Let's welcome in Cooper Howard, director of fixed income research and strategy, Schwab Center for Financial Research.

[00:00:08]Coupe, it's going to be a big week on the data front. We're going to get the inflation prints and the retail sales.

[00:00:13]What are you expecting and where is that likely to drive yields? Which direction?

[00:00:18]>> Of course. Well, good morning Sam. Um, yes, it is a big day in or a big week, I should say, in terms of data that we get. Um, especially if you look at the inflation data. uh we get CPI tomorrow and then shortly after that on Wednesday we're going to get PPI data. Um I would not be surprised if it comes in hot, but I think that that's mainly going to be on the headline side of things because of the rise in oil prices and higher energy prices due to the situation in Iran right now. So in terms of where ultimately it's likely to move yields, we believe that longerterm yields because of partly because of higher inflation Sam are likely to stay elevated. So, I would not be surprised if we continue to see yields at where they have been recently. Um, what's been notable and kind of surprising, if you will, is that yields, especially on the longer end of the portion of the yield curve, have been in a very tight range recently. So, do I believe that we're likely to go uh lower anytime soon?

[00:01:11]Probably not. I think more the risk is that we continue to we drift a little bit modestly higher um partially because of the higher inflation that we're likely to see this week. Also, if we look back at just last Friday, labor market shows signs that the economy is in relatively decent shape still. So, I think that that is all supportive of higher longerterm yields.

[00:01:33]>> Where do you think that's going to leave the Fed as far as this easing bias is concerned? Because as long as that stays in place, it looks like that's keeping things in check for now. And I suppose, you know, equity investors, stock market um participants are wanting to know just how high yields could go because if we're talking about, you know, a 30-year at 5%, a US 10-year at say above 44, then that's going to start to perhaps dampen the bull case here because, you know, obviously we did get the uh um the few members on the Fed committee uh which said that maybe we shouldn't be having an an easing bias within uh our communication right now.

[00:02:14]>> Yeah, you obviously did see that push back against um more rate cuts. What I do think that it illustrates is that a lot of kind of difficult or a lot of difficulty and different views at the Fed right now. Now, what I believe likely is going to happen at least in the near term is that the Fed's going to be on hold. I don't think that that's too big of a surprise to too many market participants, Sam. Um, right now if you look at what the market is pricing in, there's a very low probability of any sort of a move for the rest of this year. And I think that that's probably appropriate. Like you mentioned, we do have the risk of potentially higher upside um on inflation. And it's not just higher oil prices and higher uh gas gasoline prices. Oil ultimately feeds into a lot of different things, whether it's shipping, whether it's packaging, a lot of different inputs. So I think that's also one of the reasons why on Wednesday PPI is going to be relatively important to see how much of that is feeding into things and how much inflation do we have in the pipeline.

[00:03:13]But given that we do have higher potential risks of inflation to the upside also the economy continues to hold up okay the labor market is showing signs of stabilization. Sam I think that that likely means that the Fed can sit where they're at right now and be um happy with where Fed funds rate is right now.

[00:03:32]Yeah, it certainly allows them to have that headroom to kind of sit on their hands for now and people are saying at least for the end of the year. I mean, they're talking about the potential now uh some economists and strategists out there for uh the the potential for actually raising rates come 2027 perhaps. I know the PIMCO uh Dan Ikin has actually said the war may lead the Fed to delay cuts and then raise rates, but that doesn't seem to be um I suppose impacting things too much today. Um what about Kevin Walsh? I mean you know as far as this this confirmation um is you know going to be obviously taking place this week which is going to be overshadowed I guess by everything else but I mean what does it mean once he gets his feet under the desk as the trajectory of monetary policy does it change much?

[00:04:17]>> Yeah I do think that Friday is likely to be a non-event in the market. Um, all expectations is that Kevin Worse is going to be nominated and receive full Senate confirmation to become the next Federal Reserve chair. So, I don't think that that would be too big of a surprise because that's the full expectation right now. Now, in terms of what the Fed led by Kevin Worsh is likely to do. I think what's very notable and very important is that decisions for monetary policy are made by committee. So although he's one individual that's advocated for lower short-term interest rates, those decisions are ultimately made by a committee. Um yes, the chair of the FOMC has an outsized voice relative to others, but he's going to have to influence other members on that board to believe that inflation is likely to move lower and the appropriate next move is to lower interest rates. So I think that given what's happened right now, especially with like I'd mentioned the situation in Iran, that's a tall task. So ultimately I don't really anticipate too big of a difference between um a worshled Fed because it's a committee of ultimate of where the members of the committee want to see the outlook for interest rates go.

[00:05:29]>> Okay. Anything else you're looking out for as far as fixed income is concerned this week, Coupe?

[00:05:36]>> Yeah, I think in this week uh likely we're going to see a little bit of a rangebound tenure. Um, and there could be some volatility up or down depending on how the reports come out, but longer term, Sam, we do expect the yield curve to likely steepen. Um, I do think that shorter term yields are likely buoied right here as the Fed remains on hold for the time being and that we could see a modest increase in longerterm yields.

[00:05:58]So, we do think for many of our fixed income investors, there are opportunities across the yield curve.

[00:06:04]Right now, we're suggesting a benchmark duration. uh that's about an average of six years depending on where you're choosing to invest. Uh a ladder strategy can really be an appropriate strategy to take out some of the guesswork. And then for some of those investors that like to take on a little bit more risk in their portfolio, Sam, we think preferred a little bit more favorable on those partly because of where yields are today. Also, credit risk. Many are issued by banks and finance companies and that credit risk uh has been improving recently. So, we do think that if you're a little bit more of a risky investor, that's an area that you can dabble in, but I'd highlight dabble in.

[00:06:40]We don't think that that should be your whole fixed income portfolio.

[00:06:44]>> Okay, a couple of things to watch there, Coupe. Always appreciate it. Thanks so much for joining us today. Cooper Howard, director of fixed income research and strategy, Sharp Center for Financial Research there.