US Short-End Treasury Yields Rise as Market Expects Fed May Need to Raise Short-Term Rates

US short-term Treasury yields rose. In a closely watched speech, Federal Reserve Chair Warsh emphasized the need to curb consumer price increases, easing some market concerns about the central bank's ability to fight inflation.

During Warsh's remarks, short-term Treasuries were sold off while long-term bonds gained. The two-year yield rose 5 basis points to 4.28%, while the 30-year yield fell 1 basis point to 5.19%. Both moves indicate that the market expects the Fed may need to raise short-term interest rates. Bond traders have harbored doubts about his policy stance since Warsh held his first press conference in June, when he stressed the need to bring down inflation and struck a hawkish tone.

Since the global economy reopened from the pandemic in 2021, US inflation has remained above the Fed's 2% target. But the Fed held rates steady again in July, and Warsh gave no indication of whether a rate hike is possible this year. Subsequently, long-term Treasury yields rose sharply as traders demanded higher returns to compensate for the risk of accelerating inflation.

On Friday, Warsh warned that inflation has not shown a meaningful slowdown and said policymakers must be convinced that inflation is improving, otherwise the central bank "has more work to do." He also reiterated that policymakers will bring inflation back to the 2% target, emphasizing that this goal is clear and fixed.