Fed Faces Dual Challenge as Inflation and Bond Yields Soar

The US Federal Reserve is facing a dual challenge as rising inflation and soaring bond yields put pressure on policymakers to raise interest rates for the first time in over three years.

Financial markets are betting heavily that the Fed will hike the benchmark rate by a quarter of a percentage point to a 3.75%-4.00% range, with traders now pricing in a 94.5% chance of a Fed rate hike, up from 60% just two weeks ago.

Bank of America analysts say the choice for Fed policymakers is simple: raise rates or risk large bond spikes that could lead to market instability and inflation un-anchoring.

Morgan Stanley has also joined a growing number of major Wall Street banks taking a more hawkish view on global interest rates, forecasting additional monetary tightening by both the US Federal Reserve and the European Central Bank as inflationary pressures remain persistent.