Bond Market Sees Higher Interest Rates as More Likely Amid Fed Uncertainty

The bond market is now more convinced that the Federal Reserve will raise interest rates to combat high inflation, according to recent data from CME Group. The probability of a rate hike as soon as next month has increased to nearly 58%, up from 35% just a day earlier.

Despite this, US stocks only dipped modestly, with the S&P 500 falling 0.2% and the Nasdaq composite slipping 0.5%. This reaction suggests that investors are pricing in a more credible Fed, willing to take action to control inflation even if it means slowing down the economy.

Chairman Kevin Warsh's speech at the Jackson Hole economic symposium was seen as tough talk on getting inflation back under control, but with no clear indication of how the Fed will achieve this goal. Warsh emphasized that short-term interest rates are the predominant tool for the Fed to do its job and that financial conditions are not restrictive.