The US bond market is pricing in growing confidence that Federal Reserve President Kevin Warsh will follow through on his pledge to rein in inflation, which has sat above the Fed's 2% target for roughly five years.
On Wednesday, the Fed raised interest rates for the first time since 2023 and projected further monetary tightening. Traders now have three additional rate hikes baked in through mid-next year — one more than was expected ahead of the decision. Swaps markets suggest the first of those could come as early as next month.
The repricing pushed yields on two-year US Treasuries to their highest level since 2024, reflecting the view that the Fed is prepared to tighten significantly to slow the economy and bring down prices. The shift acted as headwind for US equities, which fell after the announcement.
Two-year yields climbed to 4.74%, up from 4.6% before the Fed's decision. Longer-dated Treasuries, which are more sensitive to inflation concerns, trailed the move — a sign investors believe policymakers will act to contain price pressure. Long-term inflation expectations dropped alongside the shift.
Warsh stopped short of committing to specific future actions, but his comments underscored clear frustration with the inflation trajectory. "The recent data does not, for me, indicate that the underlying trends have improved materially," he said at a press conference following the meeting.
The market's reaction stood in sharp contrast to the Fed's July decision to hold rates steady, when Warsh's ambiguity over his inflation strategy triggered a selloff in long-dated bonds.
"We're moving away from concerns about the Fed's credibility and toward concerns about the economic impact of the Fed's focus on bringing inflation back to target," said Priya Misra, portfolio manager at JPMorgan Asset Management.
In a separate statement, the Fed said the rate increase would "support a timelier return to the Committee's 2% objective," referring to inflation.
