Tuesday opened with a host of macro data painting a complex picture: inflation on both sides of the Atlantic keeps surprising to the upside, central banks are treading carefully, and markets are rapidly repricing scenarios that looked very different just a few months ago.

The Fed: Stuck at 3.75% as Inflation Hits 3.8%

The FOMC met on May 6–7 and held rates steady at 3.50%-3.75%, following a similar decision in April that passed 8-4 — an unusually large number of dissents reflecting deep divisions within the committee.

The April CPI report, released on May 12, told the story: headline inflation accelerated to 3.8% year-over-year — the highest since May 2023 and up from 3.3% in March. Core CPI (ex-food and energy) rose to 2.8%. Energy prices surged 17.9% annually on the back of Middle East-driven oil volatility.

Analyst Lyn Alden, in her recent analysis, framed the Fed's policy shift as a "gradual print": a modest balance-sheet expansion of $20-25 billion per month aimed at maintaining reserve plumbing rather than stimulating the economy. She warned that structurally high fiscal deficits are constraining the Fed's room to maneuver, creating an era of "fiscal dominance" that may persist through the late 2020s.

U.S. 10-year Treasury yields jumped to 4.59%-4.61%, the highest in a year. Former White House economist Ernie Tedeschi, in modeling work for the Center for American Progress, attributed roughly one percentage point of the inflation overshoot to tariff policy and the Iran war.

The ECB: Drifting Toward a June Hike

The eurozone's deposit rate remains at 2.00% after the ECB's April 30 hold, but markets now price an 87% probability of a 25 basis point hike at the June 10-11 meeting — a reversal from expectations earlier this year for continued easing.

Eurozone inflation rose to 3.0% in April (flash estimate), the highest since September 2023, up from 2.6% in March. Core inflation eased slightly to 2.2%, but energy prices jumped 10.9% year-over-year, driven by the same geopolitical factors hitting the U.S.

David Beckworth, a monetary policy expert at the Mercatus Center, continues to advocate for nominal GDP (NGDP) targeting as a superior framework for handling supply shocks like the current energy-driven inflation. He argues that current rate settings may prove too accommodative given persistent price pressures.

The euro traded around 1.165 against the dollar. The DXY index weakened to 99.1, its lowest level this year.

Bank of Israel: The Opposite Dilemma

While the U.S. and Europe are fighting rising inflation, Israel faces the reverse situation. Annual CPI stands at just 1.9% — comfortably inside the 1%-3% target band and a world away from the inflation trouble driving policy elsewhere.

The Bank of Israel's key rate is 4.00%, held unchanged since March. The next decision is due on May 25. Markets price a possible modest cut, given contained inflation and a sharply appreciating shekel.

The shekel remains one of the world's strongest currencies: USD/ILS trades around 2.90, reflecting roughly 12% appreciation over the past year. This strength helps suppress imported inflation but pressures exporters.

Israeli government bond yields remain in a relatively flat curve: the 10-year benchmark stands at 3.97%, slightly down from April's 4.06%. The yield curve is moderately sloped, with 2-year paper at 3.64% and the 30-year at 4.48%.

The Bottom Line

Macro markets are at an inflection point this week. The Fed and ECB are both grappling with persistent inflation driven by geopolitical energy shocks — a factor beyond their direct control. The Bank of Israel, by contrast, enjoys considerably more policy flexibility thanks to moderate inflation and a strong currency, but the May 25 decision will test whether it maintains its cautious easing stance.

Final eurozone inflation data is due May 20. Israel's rate decision follows six days later — just ahead of the Fed and ECB June meetings.