The Federal Reserve delivered its first rate hike in three years, taking the overnight lending rate to a 3.75%-4% range from 3.5%-3.75%. Policymakers said, "Inflation remains elevated. Today's policy action will support a timelier return to the Committee's 2 percent goal."
Chairman Kevin Warsh told reporters, "This summer's inflation readings do not tell me that underlying trends have meaningfully improved," adding, "Inflation is too high and has been for too long." The move followed a run-up in oil prices tied to escalations in the U.S.-Iran war, with higher energy costs filtering into recent inflation reports, including August's CPI.
Bond prices slipped and yields climbed. The 10-year benchmark rose 2 basis points to 5.016% as it moved above the 5% line. A basis point is 0.01%, and bond prices and yields move inversely. A separate snapshot showed the U.S. 10 Year Treasury at 5.02% with a +0.024 move.
Across the curve: U.S. 1 Month Treasury 3.868% (+0.017), U.S. 3 Month 4.074% (+0.013), U.S. 6 Month 4.25% (+0.042), U.S. 1 Year 4.429% (+0.054), U.S. 2 Year 4.736% (+0.073), and U.S. 30 Year 5.361% (-0.002). The 2-year was also reported at 4.738%, flipping an earlier decline into a gain. Hot inflation prints have been pressuring longer maturities, pushing the 10-year to a 2007 high on Tuesday.
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"The Fed has signaled it does not at this stage envisage an aggressive tightening cycle," said Kay Haigh, the global head and CIO who oversees Goldman Sachs Asset Management's Fixed Income and Liquidity Solutions business. "Most FOMC members see a total of two hikes this year per the SEP, and it will likely skip October's meeting given its proximity to the midterm elections. One more hike this year in December is our base case, although this remains contingent on upcoming CPI reports and the path of energy prices."
Put simply, the path of inflation and oil is steering rate expectations, and those expectations are steering bond yields. That is the backdrop to watch if you are weighing how much interest rate risk you want to carry in your fixed income.
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