Reasoning
The current Federal funds target range is 3.50 to 3.75 percent, with the 2 year Treasury yield at 3.705%, indicating a slight premium over the upper bound of the target range. The June 2026 SEP median for the year end 2026 funds rate was 3.8 percent, and nine of eighteen SEP participants project the year end 2026 rate above the current target range, suggesting a hawkish lean among FOMC participants. Given the Fed's recent hawkish pivot in erasing the prior cutting bias, coupled with inflation persistence that might necessitate higher rates for longer, it is plausible that the 2 year Treasury yield will temporarily exceed 4.50% as market participants price in such scenarios, particularly if inflation data remains elevated or economic growth proves more resilient than expected in H2 2026.Key uncertainty
The future trajectory of inflation and the Federal Reserve's response, specifically whether inflation proves stubbornly high necessitating further rate hikes or tightening of financial conditions, or if it moderates sufficiently to allow for a pivot back to rate cuts or holds.