U.S. Treasury yields remained largely flat on Wednesday morning as financial markets awaited the outcome of the Federal Reserve’s two-day policy meeting. The benchmark 10-year Treasury yield was trading at 5.004% at 4:30 a.m. ET, while the 20-year and 30-year notes held steady at 5.409% and 5.372%, respectively.
The Federal Open Market Committee is scheduled to release its latest monetary policy decision at 2 p.m. ET. According to the CME FedWatch tool, Fed funds futures are currently pricing in a 92.5% probability of a 0.25 percentage point interest rate increase, a significant shift from the 33% likelihood observed just a month ago.
Recent economic data has intensified inflation concerns. The Consumer Price Index revealed that annual inflation reached 3.4% in August, while the Federal Reserve’s preferred gauge, the Personal Consumption Expenditures price index, rose by 3.7% annually in July. Compounding these pressures, oil prices have stayed above $100 per barrel.
The persistent inflation figures have contributed to rising long-term bond yields, pushing the 10-year Treasury yield to its highest level since 2007 earlier this week.
Market participants are also weighing the political implications of the central bank’s decision. Brent Wilsey, chief investment officer at Wilsey Asset Management, warned that a decision to hold rates steady could backfire. He noted that while a pause might initially surprise stock markets negatively, it could also damage the Fed’s credibility and fuel perceptions that the central bank is succumbing to political pressure to maintain current rates.
This comes amidst repeated calls from the Trump administration for the Fed to lower borrowing costs. Jonathan Pryor, co-head of FX dealing at Marex, observed that the monetary policy landscape has shifted dramatically. He stated that the initial expectation of a prolonged rate-cutting cycle has reversed, as central banks now prioritize tackling supply-side inflation while navigating global bond market volatility.
If they pause, will they lose credibility or just appease the White House? Either way, I’m worried about yields staying this high.
92.5% chance of a hike is wild when you consider just how much the narrative flipped in a single month.