INSIGHTS

On May 18, 2026

AAM Viewpoints — Hot Inflation Prints Cool Rate Cut Hopes

Market Optimism vs. Persistent Oil Risks

As equities shift focus from Middle East tensions to earnings, key risks remain for investors. The recent rebound in U.S. stocks has occurred despite the primary catalyst for the earlier selloff — elevated oil prices — remaining firmly in place. Energy costs have been stubbornly high following the ceasefire between the U.S. and Iran that began on April 7, 2026. Since then, the price of Brent Crude has largely remained over $100/barrel, with little sign of near-term relief, leaving some to wonder how higher-for-longer oil prices will impact the cost of other goods and services. As incoming Chairman of the Federal Reserve, Kevin Warsh, prepares to take the helm, we anticipate energy prices, along with other factors, could complicate the Fed’s path forward, and duration management could be paramount for investors.

Inflation Pressures Reaccelerate

Oil-driven inflation risk is no longer a prospective scenario, but a reality now evident in data. In March, market participants were relieved to find out higher oil prices had not yet leaked into core CPI (Consumer Price Index) and PPI (Producers Price Index) prints, while headline figures showed expected increases due to energy costs. However, April price index results were far from the expected, as Core CPI rose for a second straight month, while producer prices surged across both headline and core measures to their highest levels in years. In response, investors added to bets of future Fed hikes, seeing an 80% chance of higher rates by next year. Elevated oil prices have likely eliminated the prospect of near-term Fed cuts but are only part of what’s driving the Fed’s path forward.

As of 5/13/2026 (Source: Bureau of Labor Statistics)

As of 5/13/2026 (Source: Bureau of Labor Statistics)

Stronger Data Complicates the Fed’s Path

While inflation can be viewed as a primary driver to monetary policy, it is not the only variable to consider; other factors include labor market strength, Fed policy stance, and real wages. As multiple Fed officials have recently indicated their focus has shifted from the labor market to inflation, recent data supports this, with nonfarm payrolls rising for the second straight month in April. The unemployment rate remained steady, after having cooled from higher levels late last year, further confirming stable U.S. jobs. Meanwhile, Kevin Warsh will be adopting the most disagreeable Fed in decades after a recent record number of dissents occurred at the last FOMC meeting, the majority of which rejected a bias toward further cuts. Real wages have also turned negative for the first time in three years in April with the CPI print of 3.8% exceeding Average Hourly Earnings of 3.6%. With multiple factors reinforcing restrictive policy, we believe investors may want to rethink their duration exposure.

As of 5/12/2026 (Source: Bureau of Labor Statistics)

Duration Management in a Higher-for-Longer Landscape

Amid rising inflation, labor market stability, and a hawkish Fed, investors who are weary of interest rate risk may want to be proactive in their duration management. However, we believe investors should be cautious when mitigating duration risk, as the short end of the curve may offer limited income, making real yields less attractive. A selective approach to low duration sectors with higher carry, such as securitized assets, CLOs (collateralized loan obligations) and preferreds, have the potential to help investors keep up with inflation while also reducing interest rate risk.

As of 5/12/2026 (Source: FactSet, JP Morgan Indices) | Past performance is not indicative of future results.

CRN: 2026-0514-13468 R