June 5, 2026
Not investment advice.
This month, the ECB and the Bank of Japan are expected to raise interest rates, but the Fed isn’t. However, the odds (as reflected in bond pricing) of the Fed hiking this year have gone from 0% before the war to now pricing in one hike by December.
The truth is, the people at the Fed have little idea whether they will hike or not. They will make a decision on the day, once they know whether the Strait is open or closed and whether the stock market is up or down.
However, once a Fed hike is in play, the game shifts. Gold, Bitcoin, and copper stop going up. In fact, Bitcoin hit fresh lows. The yield curve begins to flatten (long-end rates fall relative to short-term rates, shown below). It may take some of the fluff out of the equity market. Yes, the Fed is that powerful—if they choose to exercise their authority.
The story had been that the Fed would lose independence and DJT would appoint someone who follows orders. But while the new Fed chief may be quite political—that’s how he got the job—once he has the job, he has it and is independent. What little is known about his thinking from his past comments leans more hawkish. A number of notable voting members of the Fed have said the next move might be a hike.
Markets are a game of expectations—numerical and emotional—relative to reality. The expectation until recently was dovish. Now it is turning more hawkish, and market pricing is shifting with it.
Prior to today’s market action, I had changed my view on the dollar and am reassessing long-end US bond yields. The violent sell-off in long-end bonds was in part due to the market thinking monetary policy was too loose. The war is now triggering a set of policy choices that may end that looseness. Europe will hike first into an economy that is already not showing many signs of life.
I will be traveling for the next two weeks and will write a note if time allows, but may not if it doesn’t.
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