#Gate广场五月交易分享 Inflation stickiness worsens! Will Waller press the rate cut button after taking over as Fed Chair?

On Tuesday (12th), the U.S. Senate approved a key vote on Kevin Waller, confirming his appointment to the Federal Reserve Board of Governors for a 14-year term, which also means he is just one step away from officially succeeding Powell as Fed Chair. Meanwhile, the Senate has begun the confirmation process for Waller’s four-year term as Fed Chair, with a vote expected as early as Wednesday (13th).

Market expectations suggest that, under persistent inflation, Waller’s succession as Fed Chair will not fundamentally change the outlook for monetary policy. U.S. Treasuries will continue their steep upward trend, and due to the high level of risk-free rates, there will be some impact on other major asset classes.

Chair Appointment Vote Imminent
On the 12th, the U.S. Senate confirmed Waller’s nomination with 51 votes in favor and 45 against, largely along party lines. Next, Waller will undergo the Senate’s final confirmation vote for his appointment as Fed Chair, expected to take place on the 13th. Waller, 56, previously served as a Fed Governor from 2006 to 2011. If confirmed, he will succeed Powell as Fed Chair. Powell’s 8-year term will officially end this Friday (15th). However, Powell’s term as a Fed Governor will continue until 2028. He has previously stated that he plans to remain on the Board until the completion of the Fed headquarters renovation project investigation. According to the system, the term for Fed Governors is 14 years, and the Chair’s term is 4 years. Waller’s approval means that another appointee previously nominated by Trump, Milan, will end his short tenure. Milan had succeeded Kuggler, who resigned in August 2025, to join the Board.

As Waller takes over the Fed, U.S. monetary policy faces a complex situation. On one hand, escalating conflicts in the Middle East and previous tariffs implemented by the Trump administration continue to push inflation higher. According to the latest data from the U.S. Bureau of Labor Statistics (BLS) on the 12th, the U.S. April Consumer Price Index (CPI) rose 3.8% year-over-year, above market expectations of 3.7%, reaching the highest level since May 2023. On the other hand, the U.S. labor market remains characterized by “low hiring, low layoffs,” with overall unemployment stable, but with significant volatility in new employment data.

Waller previously changed his stance to support rate cuts in order to secure Trump’s nomination, advocating for increased coordination between the Fed, the Treasury, and the Trump administration in non-monetary policy areas, and pushing for balance sheet reduction. He believes that shrinking the balance sheet will create room to lower policy rates. He has also publicly criticized the Fed’s institutional arrangements multiple times, calling for “structural reforms.” According to the current schedule, the next Fed meeting is set for June 16-17, likely to be Waller’s first policy meeting as Chair.

Will Waller press the rate cut button?
However, the market generally expects that Waller’s appointment will not fundamentally change the outlook for Fed policy. Expectations for rate cuts this year have significantly diminished, and some are even betting on rate hikes. According to the CME FedWatch Tool, after the April CPI data was released, the market priced in over a 30% chance of a 25 basis point rate hike in December, up sharply from 21.5% the previous trading day.

Chris Lau, senior investment portfolio manager at Invesco Fixed Income, said: “This year is a transition period for the Fed, and inflation remains quite sticky, so there is significant uncertainty in policy. Recently, geopolitical tensions have caused international oil prices to surge, increasing inflation pressures, and the U.S. economy has not shown clear signs of recession, with the labor and employment markets performing well. Therefore, the Fed lacks urgency to cut rates quickly. Waller is known for his cautious stance on inflation and market-oriented approach. Of course, the market currently expects him to face pressure from the White House and Trump’s administration to cut rates, but fundamentally, inflation remains high and is likely to continue rising due to conflicts in the Middle East. Waller is probably more inclined to maintain a stable, cautious monetary policy.” He also added, “The Fed’s policy is decided collectively by the 12 voting members of the FOMC, and the Chair’s statements and views do not necessarily influence other members. The decision-making process remains transparent. Therefore, from the perspective of monetary policy logic, a change in Chair alone will not cause a fundamental shift.” Based on this analysis, he believes the baseline scenario remains that the Fed is unlikely to cut rates this year, and if it does, it will probably only do so once by the end of the year. Overall, the Fed will likely keep rates higher for longer.

Goldman Sachs’ U.S. economics team stated in a research report last weekend that, influenced by energy costs, U.S. PCE inflation may stay around 3% through 2026, above the Fed’s 2% target, delaying the conditions necessary to restart rate cuts. Due to inflation being more sticky than expected, their forecast for rate cuts in the U.S. has been pushed back by a quarter, with the Fed expected to implement the next two cuts in December 2026 and March 2027, respectively. However, they maintain their forecast that the terminal rate for this cycle will be between 3% and 3.25%. The current federal funds rate range is 3.50% to 3.75%. Wells Fargo noted that if Waller were to abruptly cut rates early in his tenure, it could be interpreted by the market as “capitulation on inflation.” If inflation expectations become unanchored, he would face a more severe trust crisis than Powell. Rising energy costs are affecting core consumption areas like food, creating a “structural stickiness” that Waller must remain highly vigilant about before pressing the rate cut button.

How it will affect U.S. debt and other assets
This shift in expectations is also evident in the U.S. bond market. Recently, U.S. Treasury investors believed that the “Waller trade” would be profitable—betting on aggressive rate cuts after Waller’s appointment, which would lower short-term yields and, through balance sheet reduction, elevate long-term yields, steepening the yield curve. Now, investors believe Waller will not abandon his policy stance of rate cuts and balance sheet reduction, but he (Waller) cannot simply be a “puppet” of Trump. Adam Marden, co-head of global bonds at T. Rowe Price, said that U.S. bond investors are suddenly realizing that economic events, not ideology, will determine his policy choices.

For the bond market, this means short-term bonds, such as the 2-year yield, which are most sensitive to interest rates, will not change much. However, long-term bonds, influenced by fiscal policy and inflation outlook, will continue to rise. The 10-year yield has already reached 4.4%, a relatively high level, so it may only rise slightly further, with limited magnitude. Nonetheless, the yield curve will continue to steepen.

Steven Barrow, chief strategist at Standard Chartered Bank and veteran bond investor, predicts that the 10-year Treasury yield will break above 5% this year, more than 50 basis points above current levels. Bank of America strategists believe the market is significantly underestimating the potential for Fed rate hikes. After strong non-farm payroll data in April, the probability of a rate hike increased further. One of their recommended trading strategies is to bet on rising yields for 2-year Treasuries. Additionally, the market is concerned about the persistent steepening of the yield curve and high global risk-free rates, which could have chain reactions across asset prices.

We see two main impacts from this.
First, because many assets use risk-free rates as discount rates, higher risk-free rates will put pressure on stocks, especially growth stocks, tech stocks, and real estate stocks.
Second, for credit bonds, this favors investment-grade bonds, especially short-term bonds, because higher locked-in interest rates at purchase generally mean higher returns. Also, given the ongoing steepening trend, investors tend to prefer shorter maturities.
Barrow also believes that if the 10-year yield truly breaks above 5%, it will intensify concerns about U.S. debt sustainability, increase borrowing costs for global corporations, and possibly trigger a rotation of funds from stocks to bonds.
However, the market also expects that the “Waller trade” could make a comeback. In the short term, the focus is on inflation stickiness, but ultimately, recession risks will dominate. Therefore, recent adjustments in the bond market are seen as a good buying opportunity. Ed Al-Hussainy, portfolio manager at Threadneedle, also said, “The window for the Waller trade to return depends on a significant weakening of the labor market. Such an environment could materialize before the end of the year.” #Waller confirmed as Fed Chair