The Federal Reserve held its benchmark rate at 3.5%-3.75% on July 29, but the bond market's reaction suggests traders don't believe the pause will last. Long-dated Treasury yields jumped to multi-decade highs within hours of the decision, and the Dow, S&P 500, and Nasdaq all tumbled, with the Dow posting its worst single-day loss in over a year.
Yet the bond market answered with a verdict of its own after the Fed left its benchmark rate unchanged at 3.5%-3.75% on July 29. The 30-year Treasury yield soared above 5.2% within hours of the decision, its highest level in roughly 19 years, while the 10-year yield surged to around 4.7%, nearing its highest point since the financial crisis.
Stocks tumble on the Fed's hold
Stocks fell across the board after the decision, with the Dow Jones Industrial Average, S&P 500, and Nasdaq Composite all tumbling. The Dow shed more than 1,100 points on July 29, its worst single-day performance in over a year.
Fed Chair Kevin Warsh has repeatedly promised to deliver price stability, framing the decision as a waiting game that would deliver clearer data and a decisive path forward. Rejecting the word "pause," Warsh told reporters the FOMC instead conducted a review of the economy.
According to Fed Chair Kevin Warsh: "I wouldn't characterize what we did as anything like a pause." He added that several "economic shocks," including energy-supply disruptions and tariffs, are pushing up consumer prices.
A divided Fed drops its forward guidance
Nine FOMC members voted to hold rates steady, while three dissented in favor of a quarter-point hike — the first time three members have dissented in the same direction since September 2016. Warsh has also stopped issuing forward-looking guidance in FOMC statements, a practice that had been a staple for more than two decades, leaving investors with less clarity about the committee's next move.
Long-dated yields point to a hike the Fed hasn't made
The steady climb in yields since Warsh took over as Fed chair suggests the bond market expects the historically hawkish chief to raise rates before long. Persistently high inflation, which reached a three-year high in May, and the economic shocks Warsh cited are the main drivers behind the sell-off in Treasurys, though the shift away from forward guidance may also be pushing traders toward caution.
If Treasury yields keep climbing and the Fed eventually raises rates, higher borrowing costs could slow the artificial-intelligence data-center spending that has fueled the market's rally — a hiccup that a stock market priced for perfection can ill afford.
Source: Fool
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