Inflation threat intensifies: Fed's 2026 rate cut dream shattered, two major variables shake up the market

As the year 2026 begins, market concerns about inflation have noticeably intensified. Several fund managers warn that soaring metal prices, AI-driven increases in energy and infrastructure costs, coupled with the uncertainty surrounding Trump’s plan to replace the Federal Reserve Chair in May, could push inflation levels this year far beyond previous expectations. This not only shatters the market’s optimistic outlook for rate cuts but also introduces new risks to the financial markets.

Where is the inflationary pressure coming from?

According to the latest news, inflation remains above the Federal Reserve’s 2% target. The market initially expected the Fed to cut rates twice in 2026, by 25 basis points each time. However, if price pressures intensify further, these expectations may prove unrealistic, and there is even a risk of no rate cuts throughout the year.

The main driving factors behind this are threefold:

• Soaring metal prices: Rising raw material costs directly increase production expenses
• AI-driven increases in energy and infrastructure costs: Surge in demand for data centers and computing infrastructure adds cost pressures
• Uncertainty over the Fed Chair replacement: Trump plans to replace the Fed Chair in May, which could impact the Fed’s independence and policy consistency

Market pricing lag

Interestingly, despite these risks being evident, the US stock and bond markets have not yet fully priced them in. Several investors point out that if the 10-year US Treasury yield breaks above 4.3%, it could serve as an important warning signal of inflation and financial market stress. In other words, the market is still “sleeping,” and once this threshold is crossed, more intense adjustments could be triggered.

Some institutions have already begun adopting defensive strategies, indicating that smart money is already in action.

The Trump factor and variables

Recent information shows that Trump has maintained a tough stance toward the Fed. He recently stated that Powell is “either incompetent or dishonest,” while also suggesting that rates should be “substantially cut.” This contradictory position reflects a clash between political and economic policies.

More critically, Trump plans to replace the Fed Chair in May. Market expectations suggest about a 40% chance of Kevin Warsh being appointed, and about 38% for Kevin Hassett. The policy inclinations of the new chair could differ significantly from Powell’s, further increasing policy uncertainty.

Concerns in the crypto market

From the perspective of digital assets, this development warrants attention. Rising inflation expectations and the retreat of rate cut prospects typically support US Treasury yields, which can exert pressure on risk assets. Meanwhile, the policy uncertainty caused by the Fed Chair change could also increase market volatility.

Summary

The inflationary pressures in 2026 are not unfounded but are driven by multiple real factors, representing genuine risks. The market’s previous optimism about two rate cuts is now at risk of being shattered. Political pressure from Trump on the Fed and the planned Chair replacement further exacerbate this uncertainty.

Currently, a key point to watch is whether the 10-year US Treasury yield will break above 4.3%—a threshold that could determine whether markets will reprice these risks. For crypto market participants, the coming months warrant close attention to the Fed’s policy directions and the latest inflation data.