Ceasefire, Yields, and a Fed Chair on Trial…

Markets continue to swing sharply on developments surrounding a potential U.S.- Iran agreement. Despite intermittent military skirmishes earlier this week, negotiations have advanced with proposals to extend the current ceasefire and reopen the Strait of Hormuz for at least two months being considered. Several vital issues remain unresolved though, namely control over maritime traffic, the disposition of Iran’s uranium stockpiles, the release of frozen Iranian assets, and the terms of a broader ceasefire involving Lebanon. Until these issues are settled, the risk of a breakdown in negotiations remains substantial. As a result, investors should expect continued volatility in both energy prices and risk assets.

Despite elevated geopolitical risks, Wall Street has continued to advance, propelled largely by the artificial intelligence trade. Equities, however, are not the only asset class registering significant moves. The 10-year Treasury yield surged sharply through early May before easing, yet they remain meaningfully elevated relative to early March levels — a reflection of shifting risk appetite and renewed inflation concerns tied directly to the energy markets’ disruption. If a formal agreement with Iran materializes, both oil prices and Treasury yields could retreat as geopolitical risk premiums unwind. Until then, the bond market is pricing in a more persistent inflation environment than are reflected in equity values.

Reinforcing that concern, the Federal Reserve’s preferred inflation gauge — the Personal Consumption Expenditures Index — is due for release tomorrow. Consensus expectations call for headline PCE to rise 3.8% year-over-year with Core PCE projected at 3.3%. Both measures are also anticipated to accelerate on a month-over-month basis, suggesting inflationary pressures are broadening rather than fading. For a Fed already under intense political scrutiny, rising inflation reading would narrow policy options considerably.

The new Federal Reserve Chair, Kevin Warsh, steps into this environment carrying significant uncertainty — not merely about the economic path ahead, but about his own independence. With the Trump Administration powerfully pressing for lower rates, and the labor market showing repeated continued signs of softening, how Warsh navigates the Fed’s dual mandate may prove among the most consequential monetary policy actions of the next several years.