Last week’s Federal Reserve meeting was the end of an era for the market and a Fed led by Jerome Powell. The story was not the Fed fund rate staying steady (between 3.75%-3.50%) — it was the four dissents at the FOMC. The last time this happened was in 1992. Three regional bank presidents, Hammack, Kashkari, and Logan, objected not to the hold itself but to the easing bias embedded in the statement's language, stating they did not support its inclusion “at this time.” One dissenter, Governor Miran, favored cutting. The asymmetry here matters: three hawks and one dove.
The three dissenters were not crying wolf. They were responding to real data in an environment where energy prices are adding a second layer of inflation pressure on top of an already-above-target baseline. When the market asks whether cuts are coming in the second half of 2026, the honest answer from this FOMC is: not obviously, and not without a meaningful deterioration in the labor market.
Core PCE, the Fed’s favorite measure of inflation, came out to 3.2% in March. The last time this measure hovered close to this was November 2023. For long-term data this measure has hovered around 2.1%, close to the Fed’s 2.0% mandate.
Powell's decision to remain on the Board of Governors carries more structural weight than markets gave it credit for this week. His stated motivation, serving as a check and balance on threats to Fed independence, is notable in its candor, but the more consequential implication is mechanical. Every governor who stays in place is a governor the administration cannot replace. With Powell remaining, and with Vice Chair Jefferson and Governor Barr now more likely to hold their seats as well, the pace at which the White House can reshape the Board slows. Beyond Warsh taking Governor Miran's vacated seat, the next opening on the Board of Governors does not arise until Powell's own governor term expires in January 2028, assuming there are no voluntary departures. The administration wanted a clean break. What it got instead is a transition at the chair level sitting alongside a Board that will move toward the administration's preferred composition only gradually, and on the Board's own timeline.
Warsh’s Fed represents a deliberate break from the Powell era. Warsh’s view is that AI-driven productivity growth will compress inflation organically, creating room for Fed to lower rates. This would be a new non-recessionary easing path. Warsh wants a Fed that leads rather than follows the data, explicitly rejecting the backward-looking data dependence that defined Powell's decision framework. He intends to reduce external communication materially, scaling back or eliminating the dot plot and potentially ending the practice of a press conference after every meeting, a shift that will increase volatility around rate decisions as markets lose the interpretive scaffolding Powell spent eight years building. Warsh wants to actively trim the balance sheet which currently sits at 21% of GDP.
The first quarter GDP advance estimate delivered a 2.0% annualized growth rate, a strong rebound from the fourth quarter's anemic 0.5%, but the composition of that number matters as much as the headline for fixed-income investors. Real final sales to private domestic purchasers, the cleanest read on underlying demand stripped of trade and inventory noise, grew 2.5%, right in line with the 2.4% average for all of 2025. The economy, measured through March, was performing exactly as you would want. The problem is what that strength implies for the rate path. For the Fed, this is the most difficult possible GDP configuration: aggregate growth strong enough to argue against cuts, a business investment cycle powered by AI that has little sensitivity to energy prices, and a consumer whose staying power is being purchased on borrowed time.
CHANGES IN RATES
TreasuryMarket
Treasury yields moved higher throughout the week. The 2/10 spread narrowed from 53 basis points to approximately 49 basis points this week.
Municipal Market
AAA general obligation municipal bond yields were flat on the week. The 2/10 spread was 52 basis points, down from 56 basis points a week ago.
Selected Municipal AAA General Obligation Bond / Selected Treasury Bonds Yield Ratio
The 1-10-year ratios are quite compressed and historically rich. The muni/Treasury ratios are through the current breakeven rate of 67% (highest marginal tax rate). Ratios widened across the entire curve — munis cheapened relative to Treasuries this week.
Investment Grade Corporates
IG Corporate yield drifted higher this week following the Treasury market and the price of oil.
Washington is generating an unprecedented level of policy uncertainty.
Iran peace negotiations produced a framework proposal last week: a one-month window to negotiate a Strait of Hormuz reopening, followed by a second month for nuclear talks. But President Trump publicly cast doubt on whether Iran had paid a sufficient price, and the Strait remained closed. Markets moved with each headline. July Brent hit an intra-week high of $115 before settling back to $108. The energy market is still pricing an eventual resolution, with December Brent at $88 per barrel, but the spread between near-dated and far-dated contracts reflects a real risk premium that has not been compressed.
Friday was the war’s 60-day deadline under the 1973 War Powers Resolution, requiring the president to either seek congressional authorization for the Iran conflict or cease military operations. The administration's response was notable for its legal creativity. Trump sent letters to House Speaker Mike Johnson and Senate President Pro Tempore Chuck Grassley declaring that “the hostilities that began on Feb. 28, 2026, have terminated,” citing the ceasefire that began April 7 as the basis for bypassing the requirement entirely. The same letter simultaneously acknowledged that “the threat posed by Iran to the United States and our Armed Forces remains significant” — a contradiction that legal experts did not miss.
The Senate rejected an attempt by Democrats to halt the war for a sixth consecutive time, then left town Thursday for a week-long recess, leaving the 60-day deadline to pass without a vote, a hearing, or a formal response from Republican leadership. Sens. Collins, Murkowski, Tillis, and Curtis were among a handful of Republican senators to publicly express discomfort with the administration's approach and said they would eventually like Congress to vote on an Authorization for Use of Military Force.
The governance of the Fed itself became a Washington drama this week in ways that have direct rate implications. Warsh's confirmation was held up until the Department of Justice agreed to drop a criminal investigation into Powell, a probe that Powell himself called politically motivated. The first fully partisan confirmation vote in Fed chair history, combined with Democratic accusations that Warsh will be a “sock puppet” for the administration, creates a cloud over Fed independence that is new in this era. Markets have largely priced Warsh's confirmation as benign so far, but the institutional credibility of the central bank is a slow-moving variable. It does not show up in spreads immediately. It shows up in the term premium on long-dated Treasuries over months and years.
The 5-year Breakeven Inflation Rate finished the week of May 1 at 2.69%, 8 basis points higher than April 24. The graph above contrasts a 5-year Breakeven Inflation Rate tracked weekly. This is the market-implied inflation rate. We track this relative to core PCE, the Fed’s favorite inflation measure. The 10-year Breakeven Inflation Rate finished the period at 2.48%, 6 basis points higher than last week.
Last week's 10-year quality credit spread between BBB revenue bonds and AAA general obligation bonds was 0.83%, unchanged week over week. The historical average credit spread is 1.68%.
Investment-grade spreads for the past week were at 100 basis points, 1 basis point lower from the previous week. The long-term average for investment grade is 1.56%. High-yield credit spreads are 2.61%, 6 basis points lower than last week.
Money Market Flows (millions of dollars)
Money market fund flows were negative across almost all categories except tax-exempt munis.
Mutual Fund Flows (millions of dollars)
Mutual fund flows were positive overall except in the high-yield category.
ETF Fund Flows (millions of dollars)
Net ETF flows were negative but stayed positive in municipals.
Supply has accelerated this week. The tax-exempt calendar is projected at $12.1 billion, running approximately 32% above the same week last year.
For fixed-income investors, the Washington read this week is not primarily about the war's legality — historically, courts have declined to adjudicate war powers disputes. It is, however, about what the political deterioration implies for the administration's room to maneuver on negotiations. A president whose approval is falling, whose party is increasingly anxious ahead of midterms, and whose war funding is legally and legislatively unsettled is a president with fewer tools to hold out for a maximalist peace deal. That pressure toward a resolution, however imperfect the terms, is the most constructive scenario for oil prices, inflation expectations, and ultimately the rate path.
IMPORTANT DISCLOSURES
The information and statistics contained in this report have been obtained from sources we believe to be reliable but cannot be guaranteed. Any projections, market outlooks or estimates presented herein are forward-looking statements and are based upon certain assumptions. Other events that were not taken into account may occur and may significantly affect the returns or performance of these investments. Any projections, outlooks or assumptions should not be construed to be indicative of the actual events which will occur. These projections, market outlooks or estimates are subject to change without notice.
Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product or any non-investment related content, made reference to directly or indirectly herein will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions.
All indexes are unmanaged, and you cannot invest directly in an index. Index returns do not include fees or expenses. Actual portfolio returns may vary due to the timing of portfolio inception and/or investor-imposed restrictions or guidelines. Actual investor portfolio returns would be reduced by any applicable investment advisory fees and other expenses incurred in the management of an advisory account.
You should not assume that any discussion or information contained herein serves as the receipt of, or as a substitute for, personalized investment advice from City Different Investments. To the extent that a reader has any questions regarding the applicability above to his/her individual situation or any specific issue discussed, he/she is encouraged to consult with the professional advisor of his/her choosing. City Different Investments is neither a law firm nor a certified public accounting firm and no portion of this content should be construed as legal or accounting advice.
A copy of City Different Investments' current written disclosure statement discussing our advisory services and fees is available for review upon request.
Unless otherwise noted, City Different Investments is the source of information presented herein.
A description of the indices mentioned herein is available upon request.