Dollar Strengthens Amid Inflation Expectations, 10-Year US Treasury Yield Reaches 4.582%
The dollar index rose to 99.32 points, strengthening for a second consecutive week amid investor concerns over persistent high inflation and tight monetary policy. The yield on 10-year US Treasury bonds ended the week near 4.582%.
Admiral Warsh and 'Anchored' Inflation Expectations: Why 4.582% Is Not the Peak, but the Foothill
Opinion of an independent analyst, May 25, 2026
The dollar index has settled above 99.32, and the 10-year UST yield has reached 4.582%. The media writes: 'inflation expectations are rising,' 'the Fed may tighten policy,' 'the dollar strengthens for a second week.' But as an analyst who has watched the transformation of Fed rhetoric in real time over the past six months and compared it with movements in the bond market, I see a different picture.
This is not just another round of inflation fear. This is the moment when long-term inflation expectations of the population have broken away from their anchor for the first time since 2022. And if earlier the Fed could ignore consumer surveys, now, with new Chairman Kevin Warsh, just sworn in, the market and the regulator are entering a zone where old rules no longer apply.
Let's break down the mechanics of this shift.
[The Core]: The Anchor Has Slipped
What is really happening? Why is the dollar rising and bond yields soaring, despite the Fed formally holding rates steady for several months (3.5-3.75%) and even in April one of the Board of Governors, Stephen Miran, voted for a cut?
The market has stopped believing that high inflation is a temporary phenomenon caused by the war in the Middle East. According to the University of Michigan survey released on May 23 — the very day Warsh took the oath — long-term inflation expectations (5-10 years ahead) jumped from 3.5% in April to 3.9% in May. For comparison: back in February, before the war began, this figure was 3.4%. It seems like a difference of only 0.5 percentage points. But this is a huge shift for such an inertial metric.
Non-obvious insight:
The main driver is not inflation today, but its breadth. Consumers are recording price increases not only for gasoline (a direct consequence of the closure of the Strait of Hormuz) but also for food, clothing, and services. In April, the consumer price index rose by 0.6%, with food prices jumping 0.7%, clothing up 0.6%, and services excluding energy up 0.5%. These are signs that the energy shock is 'seeping' into all other categories. The ISM Manufacturing Input Prices index for production companies surged from 59 to 84.6 over three months — a level equal to the peak of the pandemic supply chain crisis in April 2022.
It is this breadth and persistence that forced Warsh and most FOMC members to change their rhetoric. In the minutes of the April meeting (still under Powell) published on May 21, a devastating phrase appeared: 'most members judged that some tightening of monetary policy would likely become appropriate if inflation remained persistently above the target.' And Board of Governors member Christopher Waller, in a speech in Germany on May 22, directly said: 'I can no longer rule out a rate hike in the future if inflation does not decline soon.'
The market heard this. The probability of a rate hike by the end of 2026, which was near zero a month ago, is now assessed by traders as non-zero.
Timeline and Context: 10 Days That Changed Everything
May 15, 2026: April CPI data released. Monthly increase of 0.6%. This is above expectations, but the market still attributes it all to energy.
May 20-21, 2026: Bloomberg publishes a survey of 88 economists: the Q2 PCE (personal consumption expenditures index, the Fed's preferred measure) forecast is raised from 3.6% to 3.9%. This is no longer a 'temporary spike.'
May 21, 2026: Release of the April FOMC minutes with a 'hawkish' turn.
May 22, 2026: Waller's speech in Frankfurt. He clearly states that he is now more concerned about inflation than the labor market.
May 23, 2026: Warsh is sworn in. The same day, the Michigan survey is released: long-term expectations at 3.9%.
May 25, 2026: 10-year yield reaches 4.582%.
Key observation: Warsh was sworn in by Trump on Friday, May 23, with a mandate to 'lower rates.' But market conditions have already changed. He will have to choose between political pressure and macroeconomic realities. The fact that immediately after his inauguration yields soared and the dollar strengthened suggests the market is betting on the latter.
Who Wins and Who Loses
Winners:
- US Dollar. The DXY index holds above 99.3. The dollar is the only currency that benefits from rate hikes (or even from keeping them high).
- Short positions in Treasury bonds. Hedge funds that shorted UST in anticipation of rising yields are booking profits. Especially those who entered the position when 10-year yields traded below 4.3% in early May.
- US financial and banking sector. Higher yields mean an expansion of net interest margin.
Losers:
- Corporate bond issuers. Companies needing to refinance debt in the coming months will face higher rates.
- Tech stocks with high debt and low margins. Rising UST yields make them less attractive compared to risk-free assets.
- US Treasury Department. The higher the yield, the more expensive it is to service the national debt (which has already exceeded $35 trillion). Every 100 basis point increase in the 10-year yield adds about $350 billion to annual budget expenditures.
What the Media Isn't Saying
Three things you won't hear in mainstream news.
1. Consumer willingness to endure is the new inflation anchor.
The Michigan survey showed that the rise in long-term expectations was driven by Republican and independent respondents. Their long-term inflation expectations are now more than double what they were in February 2025 — right after Trump's return to the White House. This means that even administration supporters do not believe the Iran war will end quickly and that prices will return to normal. When consumers start embedding high inflation into their long-term plans, they demand higher wages, creating an inflationary spiral. The Fed fears this more than anything.
2. 10-year yields at 4.58% are still cheap by historical standards.
Yes, this is the highest since summer 2024. But the average 10-year yield over the past 20 years is about 3.5%. And given that core PCE is around 3.3%, the real yield (nominal minus inflation) is only about 1.3%. In the 1990s, when inflation was lower, real yields reached 4-5%. From this perspective, bonds are still expensive. Many institutional investors, including RiverFront Investment Group, call levels above 4.5% a 'buying zone.' I agree — but only if inflation stabilizes.
3. The leading indicator is 30-year bonds.
While everyone is watching the 10-year, 30-year UST yields have already reached 5.08% — the highest since 2007. This is a signal that the market does not believe inflation will decline in the long term. It is the long end of the curve that shows true inflation expectations. And they are grim.
Forecast: Next 30 and 90 Days
30 days (June 2026):
The main event is the FOMC meeting on June 16-17, the first under Warsh. I expect rates to remain unchanged (3.5-3.75%). But the key will be the accompanying statement. If Warsh removes the 'easing bias' language, which Waller is actively lobbying for, it will signal that the next rate move is up. The market will react instantly: the dollar will jump to 100.5-101, and the 10-year yield will break 4.75%. If Warsh maintains neutral rhetoric, expect a pullback in yields to 4.4%.
90 days (August 2026):
The Middle East remains the main variable. If by August Iran opens the Strait of Hormuz (40-50% probability), Brent oil will fall to $85-90, inflation expectations will begin to decline, and the 10-year yield could slide to 4.0-4.2%. If the strait remains closed and the conflict continues, inflation will settle above 4%, and the Fed will be forced to raise rates by 25 basis points as early as September. In this scenario, 10-year yields will see 5.0%, and the dollar will rise to 103.
Editorial Forecast
Asset: Dollar Index (DXY)
Direction: Up in the next 24-48 hours, accelerating after the FOMC minutes release (June 16-17).
Key levels: Current level — 99.3. Resistance — 99.8 (intermediate), 100.5 (psychological). Support — 98.7.
Confidence: High (70%) — the market has already priced in a 'hawkish' scenario, and inertia will persist.
Main risk: A sudden ceasefire announcement in the Middle East. If Iran and the US sign a temporary agreement within the next 72 hours (probability about 20-25%), the dollar could crash to 97.5, and the 10-year yield could drop by 30-40 basis points. This would be a short but very strong move.
This is an editorial opinion and not investment advice.
— Editorial Team
