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Inflation stickiness worsens! Will Waller press the rate cut button after taking over as Federal Reserve 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 ascent, and with risk-free rates remaining high, there will be some impact on other 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 as Chair 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’s headquarters renovation project investigation. According to the system, the Fed Governor’s term is 14 years, and the Chair’s term is 4 years. Waller’s approval means that another official nominated by Trump, Milan, will end his short tenure. Milan had previously replaced Kugler, 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 the market expectation 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 job creation 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 “systemic reform.”

The next scheduled Fed meeting is set for June 16-17, which is 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 alter the Fed’s policy outlook. Expectations for rate cuts this year have significantly diminished, with some even betting on rate hikes. According to the CME FedWatch Tool, after the April CPI data was released, the market’s probability of a 25 basis point hike in December rose to over 30%, 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. There’s significant uncertainty in policy, especially with recent geopolitical tensions causing oil prices to surge and inflation pressures to intensify. The U.S. economy hasn’t shown clear signs of recession, with the labor and employment markets still strong, so 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 expects him to face pressure from the White House and Trump’s administration to cut rates, but fundamentally, inflation remains high and could continue to rise due to Middle East conflicts in the short term. Waller is likely to prefer 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 don’t necessarily influence other members. The decision-making process remains transparent. Therefore, from a monetary policy perspective, a change in Chair alone won’t cause fundamental shifts.” Based on this analysis, he believes the baseline scenario remains that the Fed probably won’t cut rates this year, and if it does, it will likely be only once by the end of the year. Overall, the Fed will keep rates higher for longer.

Goldman Sachs’ U.S. economics team stated in a research report last weekend that, due to 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. Because inflation is 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%–3.75%. Wells Fargo noted that if Waller were to cut rates abruptly 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 Will This Affect U.S. Debt and Other Asset Trends?
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, lift long-term yields, steepening the yield curve. Now, investors recognize that Waller’s policy choices will be driven by economic events rather than ideology.

For the bond market, this means short-term bonds, like the 2-year Treasury, which are most sensitive to interest rates, will see little change. However, long-term bonds, influenced by fiscal policy and inflation outlooks, will continue to rise. The 10-year yield has already reached 4.4%, a relatively high level, so it may increase further but not by much. Regardless, the yield curve will likely continue to steepen.

Standard Chartered’s chief strategist and veteran bond expert, Steven Barrow, predicts that the 10-year Treasury yield will break above 5% this year, more than 50 basis points above current levels. Bank of America’s strategists believe the market is significantly underestimating the potential for Fed rate hikes. After strong non-farm payroll data in April, the probability of further hikes increased. One recommended trade is betting on the 2-year yield rising. Additionally, concerns about the persistent steepening of the yield curve and high global risk-free rates could have chain reactions across asset classes.

We see two main impacts:
First, since many assets use risk-free rates as discount rates—especially growth stocks, tech stocks, and real estate—higher risk-free rates will put more pressure on these markets.
Second, for credit bonds, this environment favors investment-grade bonds, especially short-term ones, because higher locked-in yields at purchase generally mean higher returns. Also, given the ongoing steepening of the yield curve, investors tend to prefer shorter maturities.

Barrow also believes that if the 10-year yield truly surpasses 5%, it will heighten concerns about U.S. debt sustainability, increase borrowing costs for global corporations, and potentially trigger a rotation of funds from stocks to bonds.

However, the market still expects the “Waller trade” to make a comeback. Short-term, the focus remains 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.”

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