Markets are rapidly coming around to the reality that the Fed has a lot more work to do
The financial markets may be coming to the realization that the Federal Reserve is on the precipice of a full-blown hiking cycle and not merely an adjustment or tweak to its monetary policy. The 10-year Treasury note yield surged the most since April 2025 on Wednesday to 5.116%, its highest since 2007. The 2-year Treasury note yield , which is most sensitive to Fed policy, jumped to its highest since 2024. Last week, the Fed raised rates for the first time since 2023 and signaled that one more was coming this year before it is done. Expectations on Fed rate hikes are divided on Wall Street: hawkish views cap it at three quarter-point hikes to undo 2025’s cuts, while dovish economists believe the rate hikes may already be over. Both perspectives reflect expectations of targeted policy recalibration rather than an aggressive tightening cycle. History shows that isolated tweaks are rare. Back in March 1997, the Fed delivered a single quarter-point hike and stopped there because annual inflation fell from 3% to 2.2% within three months. Beyond that, hiking cycles have usually been much larger. In the modern era, the smallest hiking cycle was 137 basis points (1986-87), the median 313 basis points and the average 478 basis points, according to Deutsche Bank Global Head of Macro and Thematic Research Jim Reid. (1 basis point equals 0.01%.) Reid also points to a New York Fed study showing that markets almost always underestimate the total extent of Fed rate increases. Yields rose by double digits Wednesday across the curve due to the potential that another rate hike may come as soon as October. A hot PMI report from S & P Global that showed business growth surging to its fastest level in almost five years and comments from Fed Governor Michael Barr that “further policy adjustments are likely” increase the odds of an October hike from about 50% to 70%. US2Y YTD mountain 2-year Treasury yield, YTD But yields aren’t just spiking over a potential move next meeting, bond investors are worried about how many more hikes lie ahead. Rate hikes can’t easily fix supply-side issues like the prolonged energy shock taking place right now. And Big Tech keeps spending heavily on AI regardless of borrowing costs, which means the Fed might have to act more aggressively to tamp down inflation expectations.
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