- In May, U.S. non-farm employment significantly exceeded expectations, leading to a sell-off in U.S. bonds. The two-year yield rose to 4.162%, and the swap market has fully priced in one rate hike by the Federal Reserve (Fed) this year.
- Major Wall Street institutions quickly adjusted their forecasts. Goldman Sachs (GS:US) postponed rate cuts to 2027, BNP Paribas (BNP:FP) predicted a rate hike this year, while Citigroup (C:US) still insists on a rate cut within the year.
- The new Fed Chairman, Kevin Warsh, faces his first interest rate decision, having to navigate between the rising hawkish sentiment internally and the White House's expectations for a rate cut.
Rising U.S. Bond Yields and Established Rate Hike Pricing
Strong labor data is putting valuation pressure on U.S. bonds. The two-year yield rose to 4.162%, the ten-year climbed to 4.536%, and the thirty-year is nearing the 5.0% mark. The interest rate swap market has fully priced in one rate hike in 2026, with a 60% probability of a hike in October, and a December hike has become the market's baseline expectation.
Major Wall Street Investment Banks Withdraw Rate Cut Forecasts
Goldman Sachs (GS:US) Chief U.S. Economist David Mericle withdrew the forecast for a rate cut this year, delaying the first cut to June 2027. The bank noted that tariff transmission, rising oil prices, and demand for artificial intelligence are keeping the core Personal Consumption Expenditures (PCE) price index growth above 3.0% year-on-year in 2026, lacking the necessity for a rate cut in the short term. JPMorgan (JPM:US) maintains its baseline forecast for a rate hike in 2027. BNP Paribas (BNP:FP) expects the Fed to raise rates three times consecutively starting December 2026.
Citigroup Stands Firm on Policy Easing Path
Citigroup (C:US) is among the few institutions maintaining a rate cut forecast. The bank's Chief U.S. Economist Andrew Hollenhorst believes that strong employment will lead Fed officials to focus on inflation risks at the June meeting, but if the labor market slows in the next three months, the market will reprice for policy easing. Citigroup (C:US) maintains its forecast for a 25 basis point rate cut in September, October, and December.
Warsh's Debut Faces Multifaceted Policy Challenges
According to The Wall Street Journal, the new Fed Chairman Kevin Warsh faces his first meeting two weeks into his tenure. Cleveland Fed President Beth Hammack, who has voting rights, warned that a rate hike might be needed this summer, and Dallas Fed President Lorie Logan also expressed support for a rate hike later this year. However, the White House reiterated that economic growth does not equate to inflation, expressing expectations for a rate cut. White House Chief Economic Advisor Kevin Hassett argued that the data still leaves room for a rate cut. If rate hike expectations continue to ferment, rising real borrowing costs could increase political pressure on the ruling party before the November midterm elections.
