No rate-hiking map from the Federal Reserve

The Federal Reserve’s reduced forward guidance should lift the term premium and keep longer-term US yields biased higher, but resilient growth and earnings should allow markets to absorb the move.

• Kevin Warsh reaffirmed the Fed’s 2% inflation target, noted that it had missed it for 65 months, and said financial conditions were not broadly restrictive, supporting the author’s view that rates will remain on hold for the rest of 2026.
• By the end of August 28, 2026, 10-year and 30-year Treasury yields had risen, though less than 2-year and 5-year yields, as investors adjusted to a Fed providing less guidance about its future path.
• Payroll growth for April 2025 through March 2026 was revised down by 79,000 jobs, a relatively small revision that the author interprets as evidence of a stable rather than deteriorating labor market.
• Earnings season produced an 86% S&P 500 beat-to-miss ratio versus a 71% historical median, while earnings growth was in double digits in Europe and Japan; Nvidia’s results completed the generally strong reporting season.
• The author argues that lower private-sector leverage has reduced rate sensitivity and that markets could tolerate a US 10-year yield near 5%; he views sharply falling rates as a greater risk because they could signal a growth scare, while questioning whether higher yields caused by reduced Fed guidance would support the dollar.

Takeaway: Investors should expect a wider range of outcomes and potentially higher long-term yields without assuming that this will destabilize markets, provided economic growth and corporate earnings remain resilient; the main downside risk would be a renewed growth shock that drives rates sharply lower.