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Upward pressure on long-term interest rates will continue as long as the Iran war keeps oil prices high. Ten-year Treasury rates are currently at 4.4%, up from 4.0% before the war. The upward trend in interest rates will stop whenever there are signs of movement toward a political deal that could allow oil tanker traffic through the Strait of Hormuz in the Persian Gulf. However, no deal has been agreed to yet. Currently, Iran appears to be able to stop traffic through the Gulf when it wants, since the United States is not able to protect commercial ships from drone and missile attacks. For its part, the United States has responded by preventing Iran’s tankers from leaving the Gulf. At the moment, it appears to be a game of chicken by both sides, to see who will give in to economic pressure first.
The Federal Reserve kept its benchmark short-term interest rate unchanged at 3.5% to 3.75% at its policy meeting on April 29. Chair Jay Powell cited continued uncertainty around the future path of oil prices and inflation for preventing a shift in policymaking bias to either easing or hiking rates. He noted that consumers’ long-term inflation expectations had not changed yet. The implication is that an upward move in those expectations could get the Fed to raise rates. Finally, Powell said that he would remain in an at-large capacity on the Fed’s board of governors for a period of time after Kevin Warsh takes over as chair. He said that he does not want to act as a shadow chair in opposition to Warsh, but he does want to make sure that the threat of litigation by the Justice Department against himself and the Fed will not be revived.
Powell spent part of his final press conference defending the independence of the Fed against political influence, saying that elected officials typically have short-term views, and are more likely to want lower rates, which would lead to higher inflation in the long run. This would also cause higher inflation expectations among consumers, businesses, workers and the bond market, which would make bringing inflation down again that much harder, because of self-reinforcing expectations of rising prices. This was the lesson of the 1970s and 80s, when high inflation took years to bring down.
Mortgage rates are rising again as the 10-year Treasury’s yield has risen. Thirty-year fixed-rate mortgages are currently around 6.3%. Fifteen-year loans are at 5.6% for borrowers with good credit. Rates could tick up in the short term because of the war’s inflationary pressures. If the economy weakens, then rates should decline, but odds are that mortgage rates will end 2026 close to where they are today.
Top-rated corporate bond yields have also been following Treasury yields. AAA-rated long-term corporate bonds are yielding 5.0%, BBB-rated bonds are at 5.3%, and CCC-rated bonds are at 13.0%. CCC-rated bond rates tend to rise when the risk of recession rises, and fall when either the economy strengthens or the Fed cuts rates, which eases financing costs for businesses that are heavily indebted.
