The most piercing alarm has sounded: the risk of the Federal Reserve raising interest rates next week can no longer be ignored
As the 10-year U.S. Treasury yield, known as the "anchor of global asset pricing," further broke through the 4.7% mark and set a new high for the year against the backdrop of Brent crude oil "breaking 100" on Thursday, the most piercing alarm surrounding the Federal Reserve's interest rate hike has clearly been sounded... Rising oil prices, persistent inflation concerns, and changes in interest rate hike expectations are seriously shaking the world's largest bond market, pushing up U.S. bond yields, and increasing borrowing costs for U.S. consumers.
As the 10-year U.S. Treasury yield, known as the "anchor of global asset pricing," further broke through the 4.7% mark and set a new high for the year against the backdrop of Brent crude oil "breaking 100" on Thursday, the most piercing alarm surrounding the Federal Reserve's interest rate hike has obviously been sounded... Rising oil prices, persistent inflation concerns and changing expectations for interest rate hikes are seriously shaking up the world's largest bond market, pushing up U.S. bond yields and increasing borrowing costs for U.S. consumers. Market data shows that the 10-year U.S. Treasury yield rose 4 basis points to 4.71% on Thursday, the highest level since January 2025. This is very different from the scene in the first two months of this year - before the Iran war started in late February, the 10-year U.S. Treasury yield briefly fell below 4%. In addition, the 30-year U.S. Treasury yield also rose to 5.19% overnight, just one step away from the highest level since 2007. As of the end of the New York session overnight, U.S. bond yields of all maturities rose collectively, with the 2-year U.S. bond yield rising 4.49 basis points to 4.338%, the 5-year U.S. bond yield rising 5.21 basis points to 4.450%, the 10-year U.S. bond yield rising 3.86 basis points to 4.691%, and the 30-year U.S. bond yield rising 1.47 basis points to 5.160%. Analysts pointed out that the risk of an escalation of the U.S.-Iran war pushed oil prices further up on Thursday, thereby enhancing market expectations that the Federal Reserve may raise interest rates as soon as next week. Swap contracts corresponding to the date of the Fed's policy meeting show that the market expects the probability of the Fed to raise interest rates by 25 basis points at the July meeting has reached 38%. , much higher than about 10% a week ago. The interest rate hike time fully digested by the market is September. John Briggs, head of U.S. rates strategy at Natixis North America, said there are questions about how the Fed will respond to rising inflation driven by energy prices, which has made investors more reluctant to hold bonds as oil prices rise. He said the current debate is whether the recent surge in oil prices is enough to prompt hesitant Fed officials to support raising interest rates. U.S. Treasury yields affect borrowing costs across the economy, affecting everything from the interest rates on new debt issued by companies to the cost of mortgages. Affected by the sharp rise in the yield on the 10-year U.S. Treasury note, "the anchor of global asset pricing," the average U.S. long-term mortgage rate also climbed to its highest level in nearly 12 months on Thursday, pushing up borrowing costs for potential home buyers. Mortgage lender Freddie Mac said Thursday that the benchmark 30-year fixed mortgage rate rose to 6.58% from 6.55% last week. Is the risk of the Fed raising interest rates next week underestimated? The Federal Reserve will hold its highly anticipated July interest rate meeting next week. Macro strategist Michael Ball said on Thursday, Given that inflation remains high, economic fundamentals are solid, the FOMC's decision-making votes in favor of raising interest rates are increasing, and the Fed has a strong incentive to act early in order to enhance its credibility and ultimately reduce the extent of subsequent tightening, The market may still underestimate the possibility of the Federal Reserve raising interest rates in July. Ball believes that if the Federal Reserve unexpectedly raises interest rates next week, it will suppress market risk appetite, cause the U.S. bond yield curve to flatten, push up the U.S. dollar exchange rate, and drag down duration-sensitive assets. Looking back at the changes in expectations over the past few weeks, the weak US CPI data in June once reduced the probability of the Federal Reserve raising interest rates in July to close to 10%. However, this failed to quell the controversy. The renewed conflict in Iran has reignited the risk of energy shocks and reminded markets that U.S. core PCE inflation remains well above 2%. The surge in AI capital expenditures and loose financial conditions have further exacerbated inflation concerns. Ball pointed out that there is currently little reason to delay raising interest rates in terms of U.S. economic growth. Based on the Fed's own staff assessments and recent speeches, the Atlanta Fed's GDPNow tracking indicator shows that actual final domestic demand growth is expected to be close to 3%, business investment is accelerating, and the labor market remains stable. This provides the basis for the Federal Reserve to prioritize response to inflation.
Warsh himself also emphasized the cost of delaying interest rate increases in his recent testimony before Congress. He told Congress that the economy was on solid footing, warned that financial conditions could fuel boom-and-bust cycles, and argued that monetary policy should serve the real economy rather than Wall Street. He also pointed out that the previous 75 basis points interest rate cut not only failed to maintain employment, but also contributed to inflation further exceeding the target level. Ball said delaying a rate hike after such hawkish testimony would undermine the chairman's credibility. In addition, Ball believes that an early interest rate hike in July will be more in line with the political cycle to avoid impacting the market as the November midterm elections approach. The FOMC voting situation seems to have met the conditions: Fed Governor Waller, Dallas Fed President Logan and Cleveland Fed President Hammack have all left room for tightening policy at the July meeting, while Minneapolis Fed President Kashkari currently expects one rate hike this year. Among other members of the Fed, Governors Cook, Jefferson and Bowman have each elaborated on the conditions that support raising interest rates. As oil prices rise again, these conditions are becoming a factor again. Warsh doesn't need unanimity, especially after he embraces a more open "internal debate," but a majority in support of a rate hike appears to be forming. Ball pointed out that unexpected interest rate hikes will initially push up short-term U.S. Treasury yields, and the U.S. dollar will strengthen. and cryptocurrencies are under pressure; at the same time, volatility in duration-sensitive risk assets will intensify as easing inflation concerns collide with weaker economic growth prospects. Ball believes the sustainability of the initial market move will depend on whether the Fed's credibility is reset, reducing the need for an extended rate hike cycle.
Warsh himself also emphasized the cost of delaying interest rate increases in his recent testimony before Congress. He told Congress that the economy was on solid footing, warned that financial conditions could fuel boom-and-bust cycles, and argued that monetary policy should serve the real economy rather than Wall Street. He also pointed out that the previous 75 basis points interest rate cut not only failed to maintain employment, but also contributed to inflation further exceeding the target level. Ball said delaying a rate hike after such hawkish testimony would undermine the chairman's credibility. In addition, Ball believes that an early interest rate hike in July will be more in line with the political cycle to avoid impacting the market as the November midterm elections approach. The FOMC voting situation seems to have met the conditions: Fed Governor Waller, Dallas Fed President Logan and Cleveland Fed President Hammack have all left room for tightening policy at the July meeting, while Minneapolis Fed President Kashkari currently expects one rate hike this year. Among other members of the Fed, Governors Cook, Jefferson and Bowman have each elaborated on the conditions that support raising interest rates. As oil prices rise again, these conditions are becoming a factor again. Warsh doesn't need unanimity, especially after he embraces a more open "internal debate," but a majority in support of a rate hike appears to be forming. Ball pointed out that unexpected interest rate hikes will initially push up short-term U.S. Treasury yields, and the U.S. dollar will strengthen. and cryptocurrencies are under pressure; at the same time, volatility in duration-sensitive risk assets will intensify as easing inflation concerns collide with weaker economic growth prospects. Ball believes the sustainability of the initial market move will depend on whether the Fed's credibility is reset, reducing the need for an extended rate hike cycle.