Fed and BoJ Poised to Hike as US Bond Market Strains Under Inflation Pressure

The Federal Reserve and Bank of Japan are poised to raise interest rates this week as the US bond market continues to strain under pressure from inflation. The Fed is widely expected to hike its target range by a quarter point on Wednesday, with markets pricing an 86% chance of such a move. This would take the target rate to between 3.50 and 3.75%, a level last seen in July.

The Bank of Japan, meanwhile, is considering raising its policy rate from around 1% to 1.25% at its meeting on Thursday and Friday. This would be the first hike in three months and mark the shortest interval since the bank ended large-scale easing in March 2024.

Both central banks are responding to rising inflation, which has been driven by oil costs and a strong yen. The US Treasury Secretary has expressed support for Japan's monetary steps against yen undervaluation. However, the bond market remains under strain, with yields near their highest since October 2023.