Kevin Warsh was sworn in as Federal Reserve chair Friday by President Trump as the University of Michigan's index of consumer sentiment fell to 44.8 in May, a fresh record low, and Federal Reserve Governor Christopher Waller signaled fading appetite for rate cuts. The 10-year Treasury yield stood at 4.57 percent and the 30-year reached 5.08 percent, the highest since 2007.
The alignment reframes the new chair's mandate. Trump installed Warsh to push rates lower, but traders now bet there will be no interest rate cut over the remainder of 2026, and that a rate hike is becoming more likely. Inflation expectations and an oil shock from the Iran war have crowded out the easing trade Warsh's appointment was meant to deliver.
What shifted
The Michigan sentiment index fell from a preliminary May reading of 48.2 and from 49.8 at the end of April. One-year inflation expectations rose to 4.8 percent from 4.7 percent, against 3.4 percent in February before the war began. Five-year expectations climbed to 3.9 percent from 3.5 percent.
"Consumer sentiment fell for the third straight month as supply disruptions in the Strait of Hormuz continue to boost gasoline prices. Sentiment is now just below the previous historical trough seen in June 2022," Surveys of Consumers Director Joanne Hsu said in a statement.
Waller, in a speech Friday, said: "While measures of longer-term inflation expectations are still relatively low and appear well anchored, some expectations from one to five years ahead have moved up since the beginning of 2026, which I find concerning."
On the Street
HSBC told clients this week that U.S. Treasuries are now in a "danger zone." JoAnne Bianco of BondBloxx Investment Management told CNBC's "ETF Edge" podcast that "the next likely action is they are going to be raising rates at some point, potentially starting later this year," recommending the five- to seven-year part of the curve.
Gas prices reinforce the inflation signal. AAA data cited by Fox News put California at $6.14 per gallon and Washington state at $5.70. Illinois reached $5.01, and diesel climbed to $5.65, up about $2.10 over the past year. AAA expects more than 39 million people to travel by road over Memorial Day weekend.
The plumbing
Warsh has called the Fed's $6.8 trillion balance sheet "bloated" and argued it could be reduced while rates fall. Lou Crandall, chief economist at Wrightson ICAP, told CNBC: "It's a debate we're going to be seeing later this year. But one thing that's encouraging about all of this is that nobody, including Kevin Warsh, is arguing that any of this could be done rapidly."
The counterpoint
Fed Governor Michael Barr pushed back last week, saying "shrinking the balance sheet is the wrong objective, and many of the proposals to meet this objective would undermine bank resilience, impede money market functioning, and, ultimately, threaten financial stability." Fox News framed the gas-price spike as a political vulnerability ahead of the midterms; the center wire reporting attributes the move to Hormuz supply disruptions, without ascribing blame.
The next Federal Open Market Committee meeting will be Warsh's first as chair, and bond traders are pricing the path he inherits rather than the one he was hired to deliver.