Charles Schwab's chief investment strategist and fixed income strategist deliver a unified hawkish read on inflation, Fed policy, and the structural pressures accumulating in bonds and equities.
Inflation is not retreating. That was the unambiguous verdict from Charles Schwab's Liz Ann Sonders and Collin Martin in the latest episode of On Investing1, recorded mid-week against a backdrop of back-to-back inflation prints that left little room for optimism. Speaking from a Charles Schwab retirement client conference — where they had just stepped off stage — both strategists deliver a clear-eyed assessment: rate cuts are a conversation that should not be happening, hikes are increasingly discussable, and the structural forces driving yields higher may be more durable than markets are pricing.
The Inflation Print: No Relief in Sight
The week's data set the tone. CPI came in at 3.8% year-over-year in April, with core CPI posting a 0.4% month-over-month increase — the largest single-month gain since January 2025. PPI was hotter still. "Headline PPI 6% year-over-year and even core 5.2% year-over-year," Sonders notes, identifying energy costs — and gasoline specifically — as the primary driver. The problem, as she frames it, is one the Fed cannot solve by design: "The Fed, as someone that has inflation as part of its dual mandate, they really can't do anything directly to bring gasoline prices down."
Martin is direct in his aggregate read: "It's just still too hot. And whether it's the CPI or the PPI, they're above the Fed's 2% target. There's no shortage of inflation indicators that are out there. Most that we track are at or above 2%. They've generally been there for five years now and counting." The conflict with Iran, and its upward pressure on energy prices, has reversed what had been a gradual disinflationary trajectory. The policy implication is stated plainly: "The longer it goes on, the longer the conflict goes on, the idea of a cut really shouldn't be in our vocabulary."
From Easing Bias to Hike Discussion
Martin identifies the two conditions he believes could shift the FOMC from hold to hike — and both are live possibilities. The first is core inflation. "If core inflation, which excludes volatile food and energy prices, were to meaningfully and continue to increase, or if we saw inflation expectations get unanchored and start to rise, because then that could make inflation some sort of a self-fulfilling prophecy, that's something that could maybe result in a rate hike."
The second is the labor market. Unemployment has held between 4% and 4.5% for nearly two years, with the most recent reading at 4.3%. Stability, Martin argues, won't move the needle. But improvement might: "If we were to see that unemployment rate start to decline again, that might move the needle a little bit where you have a strong labor market and rising inflation." The easing bias that characterized recent Fed communications is already under pressure, evidenced by dissents at the last meeting. Martin's conclusion: "We shouldn't even be talking about cuts right now, given when you look at the Fed's dual mandate, when you're seeing inflation at, you know, 3% or more by a number of indicators, why would the Fed be cutting rates in that situation?"
Kevin Warsh and the Architecture of Fed Reform
The confirmation of Kevin Warsh as Fed governor — with his elevation to chair expected by week's end — introduces a structural dimension to the policy outlook. Sonders outlines Warsh's preference for trimmed inflation gauges over the Fed's traditional core PCE benchmark, which he reportedly described as a "rough swag." His preferred alternatives — the Dallas Fed's trimmed mean PCE and the Cleveland Fed's median CPI/PCE — strip out statistical outliers regardless of category. Whether that methodological shift "catches on," as Sonders puts it, remains to be seen.
Warsh has also signaled possible changes to the dot plot — the Fed's summary of economic projections that markets routinely anchor to — and toward the institution's culture of public commentary. Sonders addresses the latter with characteristic sharpness: "I've often joked that maybe the Federal Open Market Committee, the M should be changed to 'mouth,' and we're really dealing with the 'Federal Open Mouth Committee.'" Her view: the vocal independence of individual Fed members reinforces both institutional credibility and the principle that no single chair is the decisive voice.
The 10-Year Yield and a Structural Term Premium Reset
The 10-year Treasury yield, near 4.5% at time of recording and at its highest level since July 2025, became a focal point for both strategists. Martin introduces the term premium — the compensation investors demand for uncertainty over the path of short-term rates — as a key structural variable. Currently running near 70 basis points, it spent most of the pre-financial crisis era above 100 and closer to 150. With QE unlikely under Warsh's leadership, and with inflation uncertainty elevated, Martin's framing is pointed: "If we are in an uncertain and higher inflationary period, without the Fed using its balance sheet, maybe that pulls yields up a little bit higher in the form of a higher term premium."
Sonders connects the yield trajectory directly to equity market behavior. "The rolling 30-day correlation between the 10-year yield and the S&P has moved back into comfortably negative territory." The mechanism: "When the 10-year yield is fluctuating based on the inflation backdrop, that tends to lead to a negative correlation, so higher yields because of higher inflation, all else equal, are bad for the equity market." The benign growth-driven correlation regime of the Great Moderation — roughly mid-1990s to early pandemic — appears to be over, at least for now, replaced by something closer to the inflation-volatile temperamental era of the mid-1960s through mid-1990s.
AI Capital Spending: Concentrated, Debt-Financed, and Load-Bearing
One of the conversation's most important threads concerned the financing evolution of AI infrastructure. Sonders identifies the shift: free cash flow growth for the Magnificent 7 cohort has moved from above 60% year-over-year to slight negative territory, meaning the sector has migrated from internally funded expansion to debt-financed buildout. Martin flags two emerging risks — supply/demand stress in corporate bond markets, and long-duration return uncertainty — and notes that some U.S. issuers are now testing offshore debt markets in Swiss francs and euros to find incremental demand. Credit spreads remain historically tight. "Markets are not concerned," Martin acknowledges, but both hosts identify the dynamic as a risk worth monitoring with discipline.
The broader economic dependence on AI spending is Sonders' sharpest observation: "Ex-anything AI-related, business capital spending is in negative territory." That concentration elevates the bar for continued earnings beats in a cohort already priced for perfection.
The Consumer: Sentiment at Record Lows, Hard Data Still Holding
Real consumer incomes printed negative year-over-year in the most recent report. Yet GDP growth persists near 2%, equity markets remain elevated, and consumption — though moderating — continues. The divergence between hard data and sentiment is stark. Sonders traces it to something more visceral than economic modeling can capture: "The man on the street, and the woman on the street, particularly if they're in their car and they're going to buy gasoline, they don't think in core-versus-headline and trimmed mean. They think, 'This is more expensive than it was a year ago or two years ago or three years ago.'" University of Michigan consumer sentiment has reached record lows across the measure's many-decade history. The psychic damage of persistent inflation is real — and it is showing up in data even as the hard economy holds.
3 Key Takeaways for Advisors and Investors
1. Rate cuts are off the table — and hikes are a live discussion. The inflation data, the conflict-driven energy dynamic, and the erosion of the Fed's easing bias collectively demand a full recalibration. Advisors should revisit any portfolio positioning or client communication built on rate reduction assumptions and stress-test for a prolonged hold — or worse.
2. The term premium reset is the under-watched yield driver. The structural case for a higher term premium — built on inflation uncertainty, reduced Fed balance sheet participation, and relentless Treasury supply growth — suggests the 10-year yield can move higher independent of Fed action. Duration exposure and the equity-bond correlation regime both deserve fresh scrutiny.
3. AI capital spending concentration is now a systemic earnings and credit risk. The migration from cash-flow-funded to debt-funded AI infrastructure, combined with negative ex-AI business investment, means the cycle is increasingly dependent on a narrow sector continuing to beat already elevated expectations. Advisors should map client exposure to this concentration and ensure it reflects intentional risk-taking, not passive drift.
Footnotes:
1 Liz Ann Sonders, Collin Martin. "Why Markets Are Shrugging Off Sticky Inflation." Schwab Brokerage, 15 May. 2026.
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