The yield on the 30-year US Treasury bond surged to nearly 5.24% on Wednesday, its highest level since 2007, after the Federal Reserve voted to maintain its key interest rate at between 3.5% and 3.75% for the fifth consecutive meeting. The 14-basis-point rise reflects growing investor anxiety that the central bank may not act swiftly enough to curb rising inflation.
Fed Chair Pledges Commitment to 2% Inflation Target
Kevin Warsh, the Fed chair, stated that the bank would "not waver" in its fight against inflation. He emphasized that the committee's target remains at 2%, dismissing any notion of an implicit higher target. "There is no soft implicit target: not on this committee's watch," Warsh said. "There's only a target and it's 2%. This Fed will not waver … Our credibility rests on performing our duties and delivering on our responsibilities."
Inflation and Geopolitical Factors
US inflation cooled to an annual rate of 3.5% in June following a brief ceasefire in the conflict between Donald Trump's administration and Iran. However, hostilities have since resumed, with both sides exchanging fire and driving oil prices higher again. This has compounded concerns about the economy's ability to absorb inflationary pressures.
Market Reactions and Analyst Views
The decision to hold rates steady unsettled investors. Felix Schmidt, a senior economist at Berenberg, noted that Warsh had not "conclusively answered the question of why the Fed did not hike." Schmidt suggested that Warsh might be relying on higher bond yields to help fight inflation in the short term, while the Fed under new leadership decides its approach.
Prior to the meeting, financial markets had priced in a 30% chance of a rate rise. Following the announcement, the probability of a September rate increase dropped to about 57%, according to CME Group's FedWatch tool. US stocks fell sharply, with the S&P 500 closing down 1.5%, the Dow Jones industrial average falling 2.2%, and the tech-heavy Nasdaq declining 1.7%.
