At this month’s FOMC meeting, the committee chose to hold Fed interest rates steady. Once the announcement concluded, however, bond vigilantes took matters into their own hands and long-term Treasury Yields shot higher. The 30-year yield closed at its highest level since 2007, and it continues to move higher today.
Historically, when it is perceived that monetary policy is out of touch with the economic or inflationary environment, large bond investors start selling – driving yields higher. Long-term interest rates are essential for the economy as they set financing costs for major purchases such as homes, automobiles, and business investments. As those rates rise, higher borrowing costs can deter investment and spending.
The Personal Consumption Expenditures (PCE) Price Index release today continued to push long-term rates higher as the Core PCE rate, which excludes the volatile food and energy components, remained elevated at 3.3%. This is well above the Fed’s 2% target for inflation, and it confirms that the Fed’s battle remains far from over.
Currently, Fed Funds Futures are pricing in a 63% probability of a rate hike at the next FOMC meeting which isn’t until September. In the meantime, Treasury yields could continue to move higher as bond vigilantes take matters into their own hands, and the Fed could find itself playing catch-up.