National markets are bracing for a decisive move by the Federal Reserve this Wednesday. Traders, using the CME FedWatch tool, are pricing in a 93% probability that the central bank will raise its benchmark interest rate – the first hike since 2023.

Bond market under pressure

The 10‑year Treasury yield surged on Tuesday, briefly reaching its highest level since 2007, while the two‑year yield climbed to a two‑year peak, now sitting about 100 basis points above the Fed’s current policy rate. These moves reflect growing investor concern that inflation remains stubbornly high.

Analysts warn that if the Fed were to hold rates steady, the bond market could experience a sharper sell‑off, further pushing yields higher and increasing borrowing costs for consumers, businesses, and the government.

Why the market expects a hike

Recent consumer‑price data showed August inflation staying elevated, prompting traders to shift their bets toward a rate increase. “Historically, the Fed has seldom deviated from rate decisions that markets have priced with such high conviction,” said Vail Hartman, U.S. rates strategist at BMO Capital Markets.

Hartman added that a surprise hold would damage the Fed’s credibility in fighting inflation, potentially triggering a rally in short‑term Treasury prices and a sell‑off in longer‑dated bonds, the dollar, and risk assets.

Fed Chairman’s stance

Fed Chairman Kevin Warsh has repeatedly emphasized that policy should respond to real economic data, not speculation. In July, he noted that market participants are learning to “play the ball, not the referee,” and signaled a willingness to act decisively.

Since that July meeting, Treasury yields have continued to climb, with the 10‑year yield now trading above 5% – levels not seen in nearly two decades.

Market commentary

Ed Yardeni, president of Yardeni Research, noted that the 2‑year and 10‑year yields are “clearly calling for a rate hike.” He warned that if yields keep rising after the Fed’s presser, the central bank could face a credibility problem.

George Goncalves of MUFG originally expected a hold but revised his view after hotter‑than‑expected inflation data, saying that doing nothing would be “problematic.” Stephen Myrow of Beacon Policy Advisors said the market has “definitively voted for September.”

Overall, the Fed’s upcoming decision will be a pivotal moment for the bond market, influencing borrowing costs across the economy and testing the central bank’s resolve to bring inflation back to its 2% target.

Original reporting: KTVZ (Central Oregon) — read the source article.