Yardeni Research said the Federal Reserve's previously signaled easing bias is increasingly difficult to sustain and could give way to a tightening bias as hotter-than-expected inflation readings and a resilient labor market alter policymakers' calculus.
The firm explicitly stated that a rate cut in 2026 is "essentially off the table," pointing to several factors behind that view: reaccelerating inflation, five straight years with inflation above the Fed's 2% target, the inflationary impact of the AI infrastructure buildout and a jobs market that is stabilizing rather than weakening.
Wall Street consensus has converged on the June 16-17 Federal Open Market Committee meeting as the likely point at which the Fed will abandon its easing bias, Yardeni Research said. The firm noted that the two-year Treasury yield is already trading above the effective federal funds rate - a market signal that the current policy rate may be too low to restrain inflation.
April's producer price index report was singled out as a key catalyst for the shift in thinking. Final demand PPI rose 1.4% month-over-month and 6.0% year-over-year, the fastest annual pace since December 2022 and well above consensus expectations, Yardeni Research said.
The PPI data contained notable compositional drivers. Truck freight costs surged 8.1% month-over-month - the largest monthly increase since 2009 - while service costs registered their biggest monthly gain in four years.
Despite this hawkish pivot, Yardeni Research continues to expect no additional rate moves for the remainder of the year, a stance it describes as "none-and-done." The firm cited several moderating forces that could offset upward pressure on prices: easing wage inflation, productivity-driven containment of labor costs and long-term inflation expectations that remain anchored.
Nevertheless, Yardeni Research warned that the probability of a rate hike is rising and said it expects the 10-year Treasury yield to push up to 4.60% in the coming days.
Implications for markets and policy
- Fixed income: upward pressure on Treasury yields if inflation and policy expectations continue to firm.
- Inflation-sensitive sectors: logistics and services may feel immediate cost pressure from freight and service-cost spikes.
- Technology and infrastructure: AI infrastructure investment is identified as an inflationary influence.