Fed Meeting Is a Big Moment for the Bond Market

Investors expect that the Federal Reserve will raise interest rates on Wednesday in a bid to curb inflation, with bets in financial markets pointing to a 90 percent likelihood of a quarter-point increase.But bond investors are still on edge, mindful of a new, less predictable leader of the central bank in Kevin M.Warsh.

If the Fed doesn’t lift rates, then investors will probably question the central bank’s commitment to containing inflation, prompting them to increase their own forecasts for price pressure and injecting new turmoil into the government bond market.Already, the 30-year Treasury yield is at its highest level in nearly two decades and the 10-year yield is flirting with a similar milestone.These yields provide the bedrock of the global financial system, used as a benchmark to establish borrowing costs for companies seeking loans and consumers taking out mortgages.“If the Fed has credibility on policy then you see inflation expectations remain contained,” said Subadra Rajappa, an interest rate strategist at Societe Generale.

“If they don’t respond to inflation, and when they can’t control inflation, that is when you are going to start to see more wild price action.”Inflation pressure has been building as a result of America’s attack on Iran at the end of February and the sharp rise in oil prices that resulted.But until recently, that inflation pressure has mostly remained a short-term worry, one that bond investors believe can be solved over the next few years, precisely because they expect the Fed to act.Investors with a longer-term view have instead focused their worries on tariffs, tax cuts, government spending and, especially, on the soaring spending (and borrowing) from artificial intelligence companies.

The expectation that higher inflation persists for the next 10 or even 30 years has not been a major concern, based on market prices.We are having trouble retrieving the article content.Please enable JavaScript in your browser se...