Executive Summary 

• No rate cuts are expected this week, but a new Federal Reserve Chair and shifting dynamics may change the outlook.

• The Fed’s rate cut plans are on hold pending clarity on the broader implications of rising energy prices.

• Most fixed income yields are higher than in recent history and in the vicinity of fair value levels.

• While yields have moved higher, the cushion against rising rates has meaningfully improved.

• While market watchers may be focused on shifting Fed leadership and inflation, bonds may offer a reasonable value proposition. 

No rate cuts expected this week, but a new Fed Chair and shifting dynamics may change the outlook

•  The Fed is expected to keep rates unchanged this week amid elevated inflation risks and uncertainty from geopolitical tensions in the Middle East, with markets now pricing in no rate cuts through 2026.

• However, Kevin Warsh, the administration’s nominee for Fed Chair, has highlighted artificial intelligence (AI)-driven productivity gains as potentially disinflationary, which could support stronger growth and reshape the future path of rates.

Shown on the left in gray are Glenmede’s range estimates of the neutral federal funds rate over time (i.e., the level of rates that is neither economically stimulative nor restrictive) based on expectations for real interest rates via the Holston-Laubach-Williams model and Glenmede’s inflation expectations. Fed Funds Rate in blue is the target rate midpoint. The dashed blue line represents expectations for the forward path of rates based on fed funds futures pricing. The dashed green line represents expectations for the forward path of rates based on the median respondent in the Federal Open Market Committee’s dot plot projections. Actual results may differ materially from expectations.

Warsh’s confirmation appears increasingly likely, with greater clarity emerging around the timing

•  The Senate nomination hearing for Warsh took place last week, with the confirmation outlook improving following the Department of Justice’s decision to drop its investigation into Federal Reserve spending.

• Jerome Powell’s term as Fed Chair ends May 15th, and betting markets increasingly expect Warsh to be confirmed by then, providing greater clarity on the policy path.

Shown on the left is an illustrative timeline of events related to the next Federal Reserve Chair. Fed Chair appointments require Senate confirmation and timing may vary based on procedural, legal, or scheduling factors. If confirmation is delayed, the incumbent may continue serving or the position may remain vacant. Board composition and individual service decisions may also influence the transition timeline. This visual was created for informational purposes only and is subject to change after the date of publication. Shown on the right are market-based odds of when Kevin Warsh will be confirmed as the Fed Chair via Polymarket. Polymarket is a prediction market where investors can place bets on various future events. References to Polymarket and use of its data herein should in no way be interpreted as an endorsement or recommendation of Polymarket by Glenmede. Probabilities or likelihoods shown are not the opinions of Glenmede. Prediction market data are shown for illustrative purposes only, may have low trading volume, and should not be relied upon as a forecast of actual outcomes.

The Fed’s rate cut plans are on hold pending clarity on the broader implications of rising energy prices

•  Prior to the Iran conflict, inflation had been trending on a relatively benign path before experiencing an energy-driven shock from rising oil prices.

• If viewed as a one-off price shock, the Fed may look to continue its cutting cycle as the year progresses, particularly if rising energy prices do not materially seep into other major categories of the inflation basket.

Shown are the year-over-year percent changes in select U.S. CPI components.  Goods (ex-Food & Energy) is represented by the commodities component (excluding food & energy). Food & Energy is represented by the food & energy subcomponents. Services (ex. Shelter) is represented by Services Less Rent of Shelter. Shelter is represented by Rent of Shelter. CPI measures the price of a basket of goods & services consumed by U.S. households. 

Most fixed income yields are higher than in recent history and in the vicinity of fair value levels

•  The shape of the Treasury yield curve is largely in-line with historical averages, though the short end of the curve may have further room to fall if the Fed resumes its rate cut path.

• Across the fixed income landscape, most markets have yields consistent with Glenmede’s estimate of fair value. Credit spreads in corporate high yield are relatively tight but still sit below the 90th percentile.

While yields have moved higher, the cushion against rising rates has meaningfully improved

• Higher starting yields in investment-grade bond markets may provide a larger cushion against rising rates. Yields would need to rise by ~0.7% for core fixed income and ~0.5% for municipals to generate a negative total return for the year.

• This larger yield cushion makes fixed income less sensitive to rate increases than in prior low‑yield periods prior to 2022.