US Borrowing Costs Soar as Fed Holds Rates Amid Inflation Fears
30-year Treasury bond yield hits 19-year high, spooking investors concerned about economic stability.
Quick Look
US government borrowing costs reached 2007 levels after the Federal Reserve held interest rates steady, fueling investor fears about inflation and the economy's ability to absorb rising prices, with 30-year Treasury yields hitting a 19-year high and stocks falling sharply.
AI-generated summary
Why It Matters
The Federal Reserve held its key interest rate steady for the fifth consecutive meeting, despite rising inflation concerns and a commitment from Fed Chair Kevin Warsh to a 2% inflation target.
US government borrowing costs have hit their highest level since 2007 after the Federal Reserve voted to hold its key interest rate steady, feeding fears that the central bank may not move fast enough to tame a rise in inflation.
The yield – or interest rate – on the 30-year US Treasury bond rose 14 basis points to nearly 5.24%, a 19-year high, after the Fed announced its decision to hold its main rate at between 3.5% and 3.75% for the fifth meeting in a row.
Kevin Warsh, the Fed chair, said the bank would “not waver” in its commitment to tackling rising prices. A prolonged period of high inflation meant that some Americans believed the central bank had an “implicit target” above its 2% target, he added.
“There is no soft implicit target: not on this committee’s watch,” Warsh said. “There’s only a target and it’s 2%. This Fed will not waver … Our credibility rests on performing our duties and delivering on our responsibilities.”
The decision to leave rates on hold has spooked investors who are worried about the US economy’s ability to absorb a rise inflation, triggered by Donald Trump’s war in Iran.
US inflation cooled to an annual rate of 3.5% in June after Washington and Tehran agreed a brief ceasefire – but this has since ended, with both sides exchanging fire and sending oil prices climbing higher again.
Felix Schmidt, a senior economist at the bank Berenberg, said Warsh had not “conclusively answered the question of why the Fed did not hike”.
He noted that the Fed chair had implied at a press conference that an interest rate rise in the near term might not be necessary due to the rise in bond yields, which has already pushed up the cost of borrowing across the US economy.
“Perhaps Warsh hopes that higher capital market interest rates will help fight inflation in the short term, while the US central bank under new leadership decides on its approach,” Schmidt said.
Before the Fed’s meeting this week, financial markets had priced in a 30% chance of a rate rise and, in the absence of such a move, nearly a 100% chance of an increase at the Fed’s September meeting.
After Wednesday, however, traders put the chance of a rate rise in September at about 57%, according to CME Group’s FedWatch tool.
US stocks also fell sharply on Wednesday, with the blue chip S&P 500 index closing down 1.5%. The Dow Jones industrial average fell 2.2% and the tech-heavy Nasdaq fell 1.7%.
What to Watch
AI outlook — possibilities, not facts
Federal Reserve will raise interest rates at its September meeting.
Likely · Within months
Open Questions
- Why did the Fed not hike rates given inflation fears?
- How will the US economy absorb rising inflation?
- What will be the Fed's approach under new leadership?
