Fed Chair Warsh faces a sharp rise in bond yields — CNBC

In the United States, a sharp rise in government bond yields is creating a dilemma for the Federal Reserve led by Kevin Warsh: the regulator must contain inflation without dealing an excessive blow to economic growth. U.S. Treasury yields continued to rise on Thursday amid inflation that remains above the Fed’s 2% target, higher energy prices, and debt borrowing connected to the global race to invest in artificial intelligence, CNBC Top News reports.

Market expectations

Over recent days, traders have increased the probability of another interest rate hike in October — about a month after last week’s 0.25-percentage-point increase. They also expect one more increase in late 2026 or early 2027 and allow for further moves.

This differs from the Fed’s June forecast, which envisaged one rate increase this year followed by cuts in subsequent years. RSM chief economist Joseph Brusuelas believes that returning inflation to the target level may require not two or three, but five or six rate hikes.

Risks to the economy

According to RSM modeling, a 10-year bond yield of 5.5% could slow economic growth to 1.5% and raise unemployment to 4.7%, while core inflation would remain at 2.4%. On Thursday, the yield on 10-year securities stood at around 5.15%.

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Not all Wall Street strategists agree with expectations of a series of rapid rate hikes. Citigroup economist Andrew Hollenhorst said the rise in yields primarily reflects higher expected Fed rates and an increase in real yields, rather than investors’ belief that the regulator’s policy is overly accommodative.

New York Federal Reserve Bank President John Williams called expectations of one more rate hike by the end of the year reasonable, but stressed the need to monitor incoming data. Philadelphia Federal Reserve Bank President Anna Paulson also suggested further policy tightening, describing possible moves as moderate. At the same time, 30-year Treasury yields reached their highest level since 2004.

According to CNBC, Warsh has emphasized the importance of market signals for monetary policy. This complicates the Fed’s choice between the risk of excessive policy tightening and the risk of the market losing confidence in its fight against inflation.