June 2026: Loose US Financial Conditions, Compounding Risks for Bank Treasury

Loose US Financial Conditions, Compounding Risks for Bank Treasury

We are headed into summer with an unusual mix: we are simultaneously behind the curve on inflation, US financial conditions are quite loose, and Fed leadership is in transition— all while a war continues to keep one of the world’s most critical energy chokepoints closed and Iran has threatened that Houthis in Yemen may close shipping more fully in the Red Sea.

The temptation for markets has been to treat each of these developments in isolation. The Strait of Hormuz closure is a geopolitical event. Friday’s May NFP surprise is a data point. The fragmentation of global monetary systems is a long-run structural trend. The change in Fed leadership is a change in communication.

This month’s Treasury Talk column will seek to link these stories.

–       The over-stimulation of the US economy as a result of pulling all policy levers simultaneously,

–       The commodity shock emanating from the Strait’s closure,

–       The 2-year Treasury note’s growing impatience with a Fed that appears late on inflation,

–       The fracturing of trust in what “safe money” actually is, and how US sanctions enforcement is made easier by “decentralized” digital assets, including USD stablecoin.

For bank treasurers specifically, the danger is that loose US financial conditions create a false sense of security. The risks are not linear. They are compounding — and the window to position conservatively may be short. What follows is an assessment of these developments and concludes with implications for bank treasury teams.

New Fed Chair

Kevin Warsh was sworn in as Fed Chair on May 22nd, inheriting a Fed whose policy stance appears increasingly inconsistent with a Taylor rule. Warsh’s option to blame former Chair Powell for continued above-target and rising inflation will expire relatively quickly.

A Taylor rule set to the FOMC’s March 2026 Summary of Economic Projections (SEP) median parameters for the real neutral rate of interest, or r*, and NAIRU suggest current Fed policy is over 100 bps too loose.  This gap appears poised to grow.

Further increases in US inflation coupled with limited US labor market weakening would increase the gap between the current level of the Fed funds rate and the FOMC guided Taylor rule estimate for where the Fed funds rate should be to meet the FOMC’s dual mandate as shown in the Taylor rule outlook matrix below.

To complicate the policy outlook further, some market observers have questioned whether the 2.50% real yield of 5yr 5yr forward TIPS may be a more appropriate benchmark for the neutral real US rate vs the FOMC’s assumed 1.1%. Note that the FOMC has revised up its assumptions for r* multiple times since the pandemic.

Assuming the neutral real rate of interest is higher – 2.50% — results in the current level of the Fed funds rate being even more offsides relative to where it should be to meet the Fed’s dual mandate.

This alternative/higher r* specification produces an even more concerning Taylor rule outlook matrix. Recall that the current upper bound of the Fed funds rate is 3.75%.

Market-based US inflation expectations appear contained — 5yr/5yr forward inflation swaps or TIPS breakevens remain relatively tame, a consolation frequently cited by some doves in the policy community.  Rather, what seems so striking is how much credence US inflation markets have put in the April ceasefire resolving the Strait of Hormuz’ closure.

By contrast, University of Michigan long-run consumer inflation expectations (5-10 years out, white line) are at roughly 2x the Fed’s 2% target — a meaningful disconnect.  Should the Fed focus on what the TIPS and inflation swap market thinks or what consumers who make economic decisions that impact inflation outcomes think?

US May CPI and May PPI will be reported later this week, 6/10 and 6/11, respectively.

The consensus expectation for May CPI is for it to rise from 3.8% y/y in April to 4.2% y/y in May which is broadly consistent with the Cleveland Fed’s InflationNow forecast.

The consensus forecast looks for May PPI to rise to 6.4% y/y in May from 6.0% y/y in April.  As can be seen below, rising US producer prices generally have been passed on to US consumers as opposed to compressing US corporate profit margins.  This points for risks for US CPI to realize at 5%+ — which is about where the one year inflation breakeven priced US CPI before the April ceasefire (look back a few charts).

What Changed Friday: US Labor Market Joins Hormuz as a US Inflation Driver

Until Friday’s NFP release, much of the debate around the US inflation outlook had been focused on the commodity price shocks from the Strait of Hormuz closure. Team Transitory 2.0 largely dismissed these as supply shocks the Fed shouldn’t respond to — unless long-run US inflation expectations became unmoored (of course, measured using the TIPS and inflation swap market – not consumer expectations)..

Friday’s May US employment/NFP data should force a more uncomfortable conversation: the US labor market is substantially stronger than the consensus and, likely the Fed, believed. Yellow dot is actual May data release vs distribution of expectations.

The NFP sector heatmap also suggests a broadening out of US labor market growth to include more sectors.  You can read more details on the May employment report here.

Meaningful strength in the US labor market seems plausible given:

1. Tighter immigration policy created a negative supply shock to the US labor force

2. In late 2025/early 2026 US policymakers simultaneously deployed fiscal stimulus, Treasury QE (think short WAM/long-end buybacks), monetary stimulus, and financial deregulation — treating a mid-term election cycle as though it were a recession.

As I pointed out in my August 2025 column, Team Transitory delivered monetary policy stimulus alongside other forms of policy stimulus – fiscal and deregulation – amid a negative labor supply shock.

Policy stimulus arrives with long and variable lags.  As we learned painfully post-Covid, too much policy stimulus in the face of negative supply shocks is not a good thing for inflation.

US Financial Conditions Confirm Excess US Policy Accommodation

Highly accommodative US financial conditions support the policy over-stimulation thesis (higher number = easier conditions; most accommodative reading: January 2026, just prior to the Iran conflict).

Two additional signals are worth watching:

· US employment economic surprise sub-index (Exhibit 2 — positive = surprise vs. consensus): further upside would reinforce the hawkish case

· 2yr Treasury / Fed funds gap (~40 bps): if this widens materially, this is not term premia — it is the Treasury market signaling the FOMC is late to hike

A late FOMC produces the need for policy catch up; a central bank getting behind the curve results in rapid monetary policy tightening and financial sector accidents. Aggressive Fed policy tightening was of course, a driver behind the US S&L crisis in the 1980s, Continental Illinois’ systemic failure (1984) and the spring 2023 banking crisis involving SVB, First Republic and Signature.

Whether the 2-year Treasury’s “you are late” signal aligns with a Sept FOMC timeline remains uncertain — it could come earlier.

Even as inflation markets seem to expect a Strait reopening; Strait reopening may not bring inflation neatly back to target if financial conditions remain too loose

· If the Strait remains closed: continued inventory draws and parabolic commodity prices increase recession risk beyond current market pricing.

· If the Strait reopens cleanly: the bond market still faces the problem of apparent policy over-stimulation — the US inflation problem may not fade neatly into the background given the negative supply shock to labor and policy stimulus.

Meanwhile, measures of implied US rate volatility and equity volatility appear priced for a different/lower Fed policy path.

Interestingly, a few other central banks already are tightening — Norges Bank and RBA.  Notably, both central banks are not plagued by fiscal dominance challenges as they share a common feature: moderate government debt-to-GDP ratios.

FOMC Roadmap: June → July

June FOMC

·       At the May FOMC meeting, three FOMC voters unsuccessfully attempted to shift the statement from easing bias to neutral.

·       Since then, Hammack, Logan, and Waller have signaled more explicitly that the FOMC is poorly positioned for an inflation resurgence.

·       Warsh is expected to draft a shorter statement removing easing bias language. Such a move can be viewed as subtlety shifting the FOMC to neutral.  But as Warsh wanted to pare down FOMC communication, it can also be viewed as Warsh exercising plausible deniability on his views on whether Fed policy is out of step.

·       If Warsh withholds his dot from the June SEP – recall that he is critical of the SEP and would like to set it sunset– the median projection could shift hawkishly without direct Warsh action — more plausible deniability. But what are Warsh’s real views?

·       Fed funds futures currently price only a 13% probability of a 25 bps July rate hike.

· A more inflation aware Fed Chair should conduct himself in the June meeting in a manner to get markets repriced to at least a 50% probability of a rate hike at the July FOMC meeting.

·       Is the Warsh Fed more inflation aware than the Powell Fed?  That remains to be seen – while I appreciate the outspoken dissenters — if Chair Warsh at the June FOMC focuses markets on the possibility of a first-rate hike only at the Sept FOMC meeting, then Team Transitory remains squarely in charge.

July FOMC

·       With no August Fed meeting, if the 2-year Treasury yield rises further even as inflation rises (current spread is ~40 bps), more FOMC voters could swing towards a 25 bps Fed rate hike at the July meeting.

Strait of Hormuz: The Path to Parabolic Commodity Prices and Recession

The Strait of Hormuz has now been closed more than 100 days.  President Trump’s recent statements suggest reopening the Strait of Hormuz could take until Labor Day.

That is a dramatic revision from initial Administration estimates at the conflict’s start, and a telling indication of the failure to account for Iran’s asymmetric military capabilities.

At the same time, progress in the US-Iran ceasefire talks towards reopening the Strait appears negligible.

Such limited progress is not surprising given that the Iranian and US positions are diametrically opposite on just about every key issue.

Further, Iran has an ally in the Houthis in Yemen.  Iran threatened last week to collaborate with them to further close shipping in the Bab el-Mandeb Strait through which other Gulf countries have redirected exports.

Given the elevated headline volatility in commodity markets, many entities have stepped back from trading commodity futures even as spot prices for physical commodities continue to rise.

Why Commodity Prices Risk Going Parabolic

·       Global inventory oil and refined product depletion is ongoing, with summer travel season now amplifying demand pressure.

· US oil inventories are forecast to hit record low levels this week, increasing vulnerability to price spikes.

·       Any resumption of conflict likely destroys producing assets — implying elevated commodity prices structurally, not temporarily.

·       Government subsidies to consumers and businesses, however well-intentioned, directly increase the inflation problem by sustaining demand and further boosting prices

The Diesel Problem: Where Energy Shock Becomes Core Inflation

Rising diesel prices deserve particular attention given diesel’s centrality to agriculture and trucking. Shipping and transport surcharges act as a transmission mechanism, converting energy inflation into goods prices — ultimately bleeding into core inflation and complicating central banks’ tasks considerably.

Even If One Buys A Strait Reopening Soon (I Don’t), Normalization Takes Time

Two Cycles of Macroeconomic Pain

If the Strait remains closed, it creates a two-stage macro problem:

1. Near-term: Negative supply shock drives inflation higher, driving interest rates higher.

2. Medium-term: The longer the Strait remains closed, and commodity prices stay elevated, the more recession risk builds and a synchronized global downturn becomes possible — eventually overwhelming the policy stimulus-driven US labor market strength described previously.

The recession risks to the US economy of a more protracted Strait closure may be underpricedwhich gives banks a window of opportunity to evaluate CECL reserves and dispose of any areas of credit concern through outright asset sales or securitization.

As the subsequent chart illustrates, US recession risk is currently not deemed high.  While it is true that the US is a net energy exporter, higher energy prices still can be expected to produce stress on other parts of the US economy.

It also is relevant to reflect on how tighter Fed policy may pressures key US allies who are already under strain due to the closure of the Strait.  The US remains a significant importer of foreign capital from both the Middle East and Asia. Stress in either region can spillover directly into US financial conditions — closing the loop back to the Fed’s own policy problem.

The Search for “Safe Money” Continues

Money serves two core functions: store of value and means of exchange. Banks intermediate this money into credit. Money rests on trust — and that foundation has been fracturing.

Collective belief in what constitutes money has become increasingly fragmented, both domestically and globally. Since 2008, alternative monetary forms have proliferated: cryptocurrencies, precious metals, stablecoins, and fx-denominated deposits.

Two Drivers Explain the Proliferation of Quasi-Money

1. Very elevated government debt and unconventional monetary policy eroding confidence in fiat currency.

2. Growing geopolitical weaponization of money — the use of finance as a geopolitical tool.

While the first point – fears of government debt monetization – plays a key role dating back to Bitcoin’s creation in 2008, weaponization of money/capital controls is also a key concern.

On the second point: US financial sanctions on Russia following the Ukraine invasion escalated the concern that USD dollar dominance could also become USD dollar weaponization.

IMF research highlights the USD weaponization theory as relevant to understanding the shift by some central banks away from USD-denominated reserve assets.

Against this backdrop, Treasury Secretary Bessent recently announced US confiscation of billions in Iranian Bitcoin wallets alongside a lesser amount in USD stablecoins.

This news is very important and – akin to the US locking Russia out of the USD payment system — should be a wakeup call that is negative for digital assets and reinforces gold’s role as an alternative central bank reserve asset.

The Iran incident shows that digital asset exchanges and custodied wallets are readily controlled by governments regardless of the underlying protocol’s security/robustness. While it is true that the blockchain protocols remain decentralized, the on and off ramps and custodied wallets do not.  As summarized below, self-custody wallets are harder to freeze — but assets held in self-custody are also largely unusable as a means of payment, undermining one of money’s key functions.

The seizure of Iran’s digital assets illustrates a paradox for the decentralized finance thesis:

· Weaponization and the geopolitical risk of digital assets is far greater than previously acknowledged by blockchain advocates.

· Usable digital assets are the most weaponizable.

·       Stablecoins effectively are digital dollars with superior surveillance capabilities and even more efficient and targeted sanctions enforcement than traditional banking.

In sum, the recent US Treasury seizure of Iran’s digital assets should prove negative for blockchain asset adoption, including both the price of Bitcoin and growth in the market cap of USD stablecoin.

This development also is structurally negative for the US Treasury market as one of the purported premises of stablecoin was to build foreign demand for US government debt.

In the medium run/after the surge in USD-denominated commodity prices abate, I expect the quest among central banks for “safe money”/reserve assets to focus even more on precious metals.

What does all of this mean for bank treasury teams?

The overarching message for bank treasurers is this:

US financial conditions are loose, but the risks are compounding.

A late Fed, a global commodity shock with no clear resolution, and a fracturing monetary system rewards early positioning — and punishes complacency.

Bank treasurers also typically are used to managing one macro regime at a time. The current environment may present an unusually difficult combination:

·       Inflation is above target and rising

·       The US labor market is stronger than expected due to excessive stimulus

·       A Fed that looks to be behind the curve and transitioning leadership with an uncertain reaction function

· US financial conditions that are loose currently, but may tighten abruptly

· There is a global commodity price shock with no clear resolution timeline that increases recession risk.

The standard playbook of “wait for Fed guidance and position accordingly” is inadequate when the Fed itself appears poorly positioned.

Suggestions for bank treasury teams include:

–       Increase the frequency of ALCO meetings to monthly from quarterly if you haven’t already done so.

–       Work towards a more integrated/less siloed view of your bank’s asset liability management.  While regulators encourage thinking of financial risks in neat little buckets, in practice liquidity, funding, profitability, and credit are all highly inter-related in bank ALM. Have more integrative discussions, meetings and analysis across different areas of your bank’s ALM functions.

– Stress test for three Fed rate hikes by year-end and a 6% 10-year Treasury yield (which is consistent with the prevailing 10-year/10-year forward Treasury rate); review fixed asset duration.

–       US banks’ CRE balances are starting to grow as pressure related to the rise in long-term Treasury yields grows. Banks should carefully assess their CRE underwriting capacity and risk appetite.

–       Banks should stress test also for a second phase to the Strait’s closure with Treasury curve flattening or even inversion if recession risks rise.

– Recession risks may be underpriced, making it an opportune time to reduce higher risk credit exposures through asset sales or securitizations.

– Evaluate the implications of an increase in recession probability for your CECL.

–       US rate vol seems too low; avoid agency MBS exposures until rate volatility rises meaningfully; evaluate pricing of interest rate caps and floors.

–       Develop market scenarios for interest rate and funding risk with triggers with your board that result in management action.

– Strengthen your bank’s term on-balance sheet liquidity.  Further spikes in commodity prices can be anticipated to produce dollar shortfalls in the global financial system.

–       Continue to monitor legislative developments on the Clarity Act with regards to potential yield bearing stablecoin and potential deposit impacts but brief your board about the developments related to Iran’s digital assets which may have a chilling effect on the digital asset market in the quarters ahead.

I look forward to speaking at the Fitch/KPMG New York Banking Summit in NYC on June 17 – perhaps I will see a few readers there!

Thanks to Treasury Talk readers and I wish you a good summer ahead.

Jill Cetina, CFA is Executive Professor of Finance at the Mays Business School, Texas A&M University, and a former Associate Managing Director at Moody’s and former Federal Reserve officer. The views expressed here are her own.

A note on timing: This piece was completed on Monday, June 8, 2026. The Strait of Hormuz situation remains fluid. Readers should treat specific probability estimates and market pricing referenced throughout as indicative of the environment at time of writing. Note there was no Treasury Talk column in May as we celebrated my eldest graduation with a BS in astrophysics from Yale University (proud mom) and I traveled to speak at FIS ALM’s annual user conference later in the month.