Anchored Inflation: Key to Keeping Bond Market Tame
March 12, 2026
Inflation has cooled from its peak in 2022;1 however, it remains too high for the Federal Reserve (Fed) to declare victory. Currently, the Fed is less concerned about runaway inflation and more focused on ensuring inflation continues to trend lower without reigniting. With the Fed’s preferred measure of inflation, core Personal Consumption Expenditures (PCE), near 3% and nominal gross domestic product around 5%,2,3 the Fed is positioned to be a neutral factor in 2026. Though markets are pricing in a 25-basis-point rate cut by year-end,4 the current expectation is that any additional easing from the Fed in the near-term will be done within a measured, data-dependent framework rather than a rapid easing cycle. More aggressive cuts remain contingent on a material weakening in labor market conditions.
The Fed’s fight against inflation over the past several years has caused longer-term interest rates to rise, and while businesses and consumers can adapt to and even benefit from higher rates, unstable interest rates are disruptive to markets and economic activity. Stable long-term interest rates are important because they support asset prices, consumer confidence and business investment by enabling longer-term planning. Declining interest-rate volatility and the normalization of the yield curve in recent months have been a tailwind for asset prices and economic activity.
Recent events have added uncertainty to the outlook for inflation and interest rates. Oil prices and short-term inflation expectations have surged following the onset of the conflict with Iran, pushing longer-term Treasury yields higher. Meanwhile, Friday’s February jobs report raised downside risks to growth, with the economy shedding 92,000 jobs and the unemployment rate rising to 4.4% from 4.3%.5 Average hourly earnings, however, came in stronger than expected.6
Key Takeaway
The stability of longer-term interest rates will remain critical to maintaining consumer confidence, capital expenditure (capex) momentum and orderly credit conditions. Interest-rate volatility, not rate level, is the primary risk currently as the Fed continues its efforts to bring inflation back to its 2% target.
Sources:
1,4Bloomberg
2,3Strategas – Weekly Economics Summary 2/22/26
5,6CNBC – U.S. payrolls unexpectedly fell by 92,000 in February; unemployment rate rises to 4.4%; 3/6/26
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