Federal Reserve officials just won't listen to us! We warned them that the economy didn't need the four cuts in the federal funds rate (FFR) at the end of 2024. The Bond Vigilantes agreed with us. Now, we conclude that the Fed has to raise short-term rates to lower long-term rates, writes Ed Yardeni, editor of Yardeni QuickTakes.
Back in 2024 and early 2025, the Bond Vigilantes pushed the 10-year Treasury bond yield up by 100 basis points. The same happened late last year. The Fed lowered the FFR three times. The bond yield drifted higher and continued to do so this year.
(Editor’s Note: Ed will be speaking at the 2026 MoneyShow Masters Symposium San Francisco, scheduled for Aug. 25-28. Click HERE to register.)
We correctly anticipated that the Federal Open Market Committee (FOMC) would pivot from its dovish stance in April to a hawkish stance in June. Then we predicted that the committee would follow up with a rate hike in July.
They didn't listen to us. So, once again, the Bond Vigilantes are pushing bond yields higher. In effect, they are saying that if the Fed won't be vigilant about inflation, then they will have to maintain law and order in the economy.
At the FOMC meeting, the committee voted 9-3 to leave the FFR unchanged at 3.50%-3.75%. Beth Hammack, Neel Kashkari, and Lorie Logan dissented, each preferring a 25-bp hike.
Fed Chair Kevin Warsh struck an unambiguously hawkish tone at the press conference. He emphasized (again) that the economy remains resilient and inflation is still above target. He reiterated that restoring price stability is the Fed's top priority. Indeed, the FOMC statement closed with the same reassuring pledge as last month: “The Committee will deliver price stability.”
So yes, Warsh talked like a hawk. However, the bond market wanted a rate hike. If incoming data continue to show resilient economic growth with full employment and persistent inflation pressures, Warsh will have to act like a hawk.
