Vanguard senior economist Josh Hirt stated on Friday that the Federal Reserve’s decision to hold rates steady at its September meeting could push Treasury yields higher.
The Federal Reserve is convening a closely watched monetary policy meeting this week, with markets widely anticipating a rate hike amid persistent inflation concerns.
Federal Open Market Committee (FOMC) policymakers have maintained rates unchanged through all five meetings this year, keeping the benchmark federal funds rate within a 3.5% to 3.75% target range.
Inflation remains above the Fed’s 2% long-run target, prompting heightened concern among officials and shifting market expectations toward a rate increase this week. The CME FedWatch tool indicates a 92.5% probability of a 25 basis point hike compared to a 7.5% chance of rates remaining unchanged.
The Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) index, rose 3.7% year-over-year in July, while core PCE climbed 3.3%. The consumer price index (CPI) increased 3.4% annually in August, with core CPI up 2.4%.
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Federal Reserve Chair Kevin Warsh and FOMC policymakers are set to announce an interest rate decision on Wednesday. (Li Yuanqing/Xinhua via Getty Images)
The expected rate hike follows rising Treasury yields, which have reached their highest levels in years due to heightened competition in fixed income markets from foreign sovereign and corporate debt issuance.
The benchmark 10-year Treasury note yield sits near 5%, its highest point since 2007. Elevated Treasury rates increase the federal government’s debt service costs, contributing to expanding budget deficits.
Josh Hirt, senior economist at Vanguard, told FOX Business that recent developments, including the latest inflation report, “almost make the case that you could have a somewhat more adverse reaction if the Fed does not go [on Wednesday] unless the communication around the rationale behind that was extremely strong relative to them actually moving at this meeting.”
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Hirt noted that he “wouldn’t see the immediate case for that to really extend any pricing if they were to move,” adding that “In fact, it could relieve some of the pressure in some extent, that the Fed did act, that the market is comfortable that they would be willing to do so.”
“I think that actually could very much be the case, in fact, rather than the alternative – which would be not going and the market potentially thinking about credibility issues and extending even further.”
“The base case would be if they were to move [on Wednesday], I wouldn’t see any necessary conditions that the market has to move higher based on that. In fact, it could potentially retrench a bit from where we are today,” Hirt added.
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Kevin Warsh was confirmed as Fed Chair in May, and September marks the third FOMC meeting he has led. (Anna Moneymaker/Getty Images)
Wednesday’s FOMC announcement will also feature the “dot plot,” which illustrates policymakers’ expectations for the future path of interest rates. Fed Chair Kevin Warsh declined to submit his own projection, citing opposition to forward guidance,
“If they were to move [on Wednesday] and you were to get, say, a level shift up in the dots at least by those participants that submit them, then that would really be an indication that I think the market could move on,” Hirt said.
“It wouldn’t be my base that you are going to see such a level shift,” he added. “At least based on the June numbers, the highest or most hawkish participant had about three rate hikes. It’s not clear to me that you would need to see a lot of members move much higher than that, if at all, but maybe just more a move up from those that didn’t have any or only had one rate hike.”
Markets now assign a higher probability to additional rate hikes following this week’s FOMC meeting, with policymakers scheduled to convene again in October and December before launching 2027 meetings in late January.
The CME FedWatch tool indicates a 49.7% chance of two 25-basis-point rate hikes before year-end, bringing the target range to 4% to 4.25%, while a 28.9% probability exists for three hikes to 4.25% to 4.5%. The tool also shows just a 20% chance of a single rate hike through year’s end.