Warsh's Rate Hike Hint Eases Bond Market Anxiety

Investors are increasingly anxious about government deficits and persistent inflation driving up borrowing costs. The Federal Reserve can help ease this concern.

The conflict in the Middle East has pushed energy prices higher, forcing heavily indebted countries to borrow more for defense spending and war efforts. This has deepened a global rout in the bond market, sending yields to multi-year and multi-decade highs.

Fed Chairman Kevin Warsh hinted at rate hikes in his Jackson Hole speech, saying there was 'more work to do' in fighting inflation. Markets welcomed this signal, which could bring greater transparency from the Fed and ease anxiety over future policy action.

The Fed's balance sheet is its biggest tool for controlling yields, but officials are unlikely to use it. Instead, convincing investors that they will act to keep inflation under control is the simplest way to calm the bond market.