As Kevin Warsh takes the helm at the Federal Reserve, bond investors are betting he’ll prioritize the central bank’s inflation-fighting credibility over President Donald Trump’s push for lower interest rates.
With the Iran war unleashing the biggest inflation surge since 2023, traders are pricing in that the Fed is virtually certain to start raising rates by December. That’s a sharp reversal from just three months ago, when markets were betting there were deeper cuts ahead.
The shift reflects the impact of turmoil in the Middle East, the resilient US economy and an AI-investment boom pushing the stock market higher, all of which have fueled concerns that inflation could remain stuck above the Fed’s 2% target for some time.
In a volatile trading week, two-year Treasury yields — the most sensitive to Fed policy expectations — climbed to as much as 4.14% Friday, the highest in more than a year and nearly 40 basis points above the top end of the Fed’s benchmark rate range. Thirty-year yields briefly touched 5.2% last week, a level last seen in 2007, before retreating to 5.06%.
Warsh assumes leadership as a growing number of Fed officials abandon their easing bias. Governor Christopher Waller — a Trump appointee who earlier this year advocated for rate cuts to protect the labor market — said Friday that the Fed’s next move is now just as likely to be a hike. A slew of policymakers, including Vice Chair Philip Jefferson and New York Fed President John Williams, are scheduled to speak this week.
