Rising inflation expectations leave the Fed in a bind

Chart of the Week

May 22, 2026

2 MIN READ

Rising inflation expectations leave the Fed in a bind

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Inflation expectations sit near a three-year high as markets adjust to a higher-for-longer backdrop at the start of Fed Chair Warsh’s term.

authors

Christopher Bole

Vice President, Financial Writer

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5- and 10-year market-based inflation expectations

Chart showing 5- and 10-year breakeven inflation rates rising since January 2026, with both measures above the Fed’s 2% target.

Source: Federal Reserve Bank of St. Louis, as of May 19, 2026. The breakeven rate is the market’s expectation of average inflation over a specific period.

New Fed Chair Kevin Warsh stepped into a challenging environment this week as Treasury yields across the curve climbed toward one-year highs.
Inflation data continues to support a higher-for-longer backdrop. Core services inflation remains persistently elevated, while the shock to energy prices brought on by the war in Iran could exacerbate the problem.
Against this backdrop, market-implied long-term inflation expectations have moved steadily higher this year, climbing further above the Fed’s 2% target and signaling persistent price pressures.
Markets have repriced the policy path accordingly, now pricing a greater probability of rate hikes than rate cuts over the next year.
A higher-for-longer backdrop may prolong challenges for core fixed income. Amid persistent rate volatility, the Agg has delivered a roughly flat return of 0.08% over the past five years, while supporting demand for alternative income sources, particularly those with low duration.¹

contributing authors

Christopher Bole

Vice President, Financial Writer

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footnotes + disclosures

Agg represents the Bloomberg U.S. Aggregate Index. Returns data as of May 20, 2026.

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