Senior Federal Reserve officials are signaling that interest rates may need to rise further over the coming months, even as bond markets strain under yields not seen in two decades. One regional Fed president said this week that rates could climb over the next six to nine months, describing the push to return inflation to the central bank’s 2 percent target — a goal he put at roughly 18 months away. A Fed governor separately said further increases are needed, though not necessarily at consecutive meetings.
Markets have taken notice. The 10-year Treasury yield has traded around 5.3 percent, the 2-year near 4.8 percent, and the 30-year recently touched 5.71 percent, its highest since 2002. Futures pricing compiled by the CME Group has put the likelihood of another hike after the October meeting at roughly one in five — up from negligible not long ago.
Higher yields are spreading beyond Treasuries. Mortgage rates near 7.4 percent — the highest in three years — are squeezing home affordability while perversely giving some buyers leverage in markets where sellers are starting to concede on price. The federal budget deficit, meanwhile, has jumped to nearly $2 trillion, adding supply pressure to the bond market as Washington borrows heavily into rising rates.
The Fed’s next decision will test how much tightening financial markets have already done on the central bank’s behalf. For borrowers, businesses and homebuyers, the era of cheap money is not coming back on any timeline officials are currently offering.
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