US bond traders lowered their expectations that the Federal Reserve will raise interest rates at its next meeting after officials kept their benchmark steady on Wednesday, while 30-year Treasury yields surged to their highest since 2007.
Interest-rate swaps reflected a roughly 60% probability that officials led by Chairman Kevin Warsh will boost borrowing costs in September after the decision, even as some officials signaled growing conviction that a hike would be needed to control resurgent inflation. A hike is fully priced in for December.
In the Treasuries market, the 30-year yield climbed more than 10 basis points to the highest level in 19 years. Yields on two-year notes — which are most sensitive to changes in the Fed's policy — declined by six basis points to 4.23%, while 10-year yields were up five basis points to 4.66%. The dollar dropped.
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In the second policy statement released under Warsh, officials held back from offering much guidance on their plans for further policy moves, reiterating the central bank's commitment to price stability. Policymakers voted 9-3 to hold the benchmark federal funds rate in a range of 3.5% to 3.75%. Dallas Fed President Lorie Logan, Cleveland's Beth Hammack and Minneapolis Fed chief Neel Kashkari dissented in favor of raising rates.
“The early trade is just relief that Fed didn't move today,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. The dissents “show you the bias of the FOMC, and unless the inflation and employment data soften meaningfully between now and September, then that meeting is in play for a hike.”
The decision offered a dose of clarity to a deeply divided market that had seen traders betting on a roughly 40% chance before the decision. Warsh has committed to breaking the market's dependence on forward guidance from Fed officials, leaving traders with less certainty than normal.
“Market participants are learning to play the ball and not the referee,” Warsh said in his press conference. “Market prices will continue to respond in the direction and magnitude they see fit. This is in my view a change for the better, and we're just getting started.”
The $31 trillion Treasuries market has been hit hard over the past month, down more than half a percentage point in July as US President Donald Trump's attacks on Iran pushed oil prices higher.
Inflation-adjusted Treasury yields, known as real yields, have also risen appreciably. That suggests that bond-market participants believe Fed's neutral policy rate — a theoretical level deemed neither stimulative or restrictive for the economy — is higher.
To Brandywine's McIntyre, those levels imply that last year's 75 basis points worth of rate cuts will need to be reversed by officials. He expects the Fed will opt for a series of three quarter-point hikes.
“It's clear inflation — particularly core inflation — remains at uncomfortable levels for the Fed,” Ed Hutchings, head of rates at Aviva Investors, said. “The longer interest rates are left unchanged, the more the Federal Reserve could end up having to do, even potentially removing all of the cuts delivered in 2025, if not more.”
Among major Wall Street banks, Fed forecasts have also diverged widely. Ahead of the July rate decision, Bank of America predicted three hikes this year beginning in September, while Citigroup expected a series of three cuts beginning in October. JPMorgan, Deutsche Bank and BNP Paribas have looked for a hike as the next move, and Goldman Sachs, Morgan Stanley and TD saw cuts.
ALSO READ: FOMC Highlights: Fed Keeps Rates On Hold; Warsh Says 'Won't Hesitate' If Inflation Persists
(This story has not been edited by NDTV staff and is auto-generated from a syndicated feed.)
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