Federal Reserve Chair Powell reiterated his resolve to combat inflation, pushing the market-implied probability of a September rate hike to around 60%; however, some in the bond market remain unconvinced. They worry that if Powell holds rates steady again while inflation remains stubbornly high, it would not only severely damage the Fed’s credibility but also drive up yields on long-term U.S. Treasury bonds.
In a highly anticipated speech last Friday, Powell reaffirmed his commitment to bringing down inflation. Interest-rate swap markets now assign a higher probability to a Fed rate hike in mid-September than to no action. Although the decision hinges on this week’s employment report and subsequent inflation data, the yield on the 2-year U.S. Treasury note—which is highly sensitive to policy expectations—recorded its largest rise in over two months.