Bond Market Bets Big on Fed's Inflation Takedown

The bond market is placing a specific bet that the Federal Reserve under Chair Kevin Warsh has both the will and the tools to bring inflation back under control. Investors are piling into short-dated US Treasuries, particularly two-year notes.

The Fed raised the federal funds target range to 3.75-4% on September 16, marking its first rate increase since July 2023. The market's immediate response was sharp. Two-year Treasury yields surged to nearly 4.75%, a level that reflects just how seriously investors are taking the Fed's commitment to tighter policy.

The data backs up the urgency. The Consumer Price Index rose 3.4% year-over-year in August, still well above the Fed's 2% target. Core CPI, which strips out volatile food and energy prices, came in at 2.4% annually. The month-over-month headline reading was 0.4%.