Fed Keeps Rates Steady Amid Rising Hawkish Sentiment

The Federal Reserve decided to keep interest rates unchanged at its latest meeting, leaving investors wondering how it plans to tackle inflation. The decision was expected, but the three dissents from regional bank presidents may indicate a shift in Fed thinking. Kevin Warsh, the new head of the Fed, has pledged to get inflation back to 2% and said that the central bank 'will not waver' on this goal.

Warsh emphasized that the five years of above-target inflation cannot be cured overnight, but investors are pricing in interest rate hikes. The Treasury market yield curve had flattened since the last Fed meeting, reflecting a sharper move up in short-term yields closely tied to Fed policy expectations than in longer-dated bonds sensitive to the inflation outlook.

However, after the decision was announced, the curve steepened sharply as yields on 2-year Treasury notes fell while those for 10-year notes and 30-year bonds moved up. The 30-year bond yield crossed above the 5.20% level for the first time since 2007.

Some economists now see a path toward higher rates, with Omair Sharif of Inflation Insights predicting a 25 basis point hike in September unless the labor market data collapses or core inflation prints closer to 2%. The high number of dissents underscores that policymakers are increasingly more hawkish, but Kathy Bostjancic of Nationwide notes that 'the Fed can and should remain on hold this year' since higher interest rates will not solve the energy supply shock from the Middle East nor slow AI capex driving up prices.