Bond Market Demands Action from Fed as Inflation Persists

Fed Chair Kevin Warsh and the Federal Open Market Committee (FOMC) may need to take action to address persistently elevated inflation, according to the bond market. The long end of the yield curve, which includes 10-, 20-, and 30-year Treasury bonds, has been steadily climbing throughout the year, with the 30-year yield reaching levels last seen during the financial crisis.

The increase in yields is due to two main factors: America's staggering debt pile, which surpassed $40 trillion for the first time last week, and Trumpflation, caused by President Donald Trump's tariffs and the effects of the Iran war. The price stickiness of Core Personal Consumption Expenditures (PCE), which excludes volatile food and energy costs, indicates that the effects of Trumpflation have spread well beyond the energy sector.

The bond market is signaling to Warsh and the FOMC that they need to act to address inflation, but so far, the committee has not taken any action. The prevailing inflation rate is above the Fed's long-term target of 2%, and the FOMC held rates steady at their last meeting, with a 9-3 vote. Three regional presidents dissented in favor of a quarter-point rate hike, which would be the first time since 2016 that there were three dissents in the same direction over a policy change.

Warsh has repeatedly promised to deliver price stability, and raising interest rates may be the only solution to achieve this goal. However, higher borrowing costs could be a nightmare scenario for a historically expensive stock market that's reliant on debt financing to fuel its growth.