Economists warn Fed’s silence on rate plans is rattling bond markets

Federal Reserve policymakers voted 9-3 last week to hold interest rates in a range of 3.5% to 3.75% for a fifth straight meeting, with three regional bank presidents dissenting in favor of a quarter-point increase to counter rising gasoline and other prices tied to energy supply shocks. Fed Chair Kevin Warsh declined to specify what conditions would trigger a rate hike, a stance that sent the yield on the 30-year Treasury bond to 5.22%, its highest level since 2007.

Moody's Analytics chief economist Mark Zandi said the Fed's refusal to offer forward guidance, rather than the decision to hold rates itself, poses a new risk to the economy. He said the lack of clarity leaves investors "repeatedly wrong-footed," fueling volatility in bond and stock markets and raising the odds that a future Fed meeting could trigger a serious sell-off.

Bank of America economists echoed the concern, writing that the Fed is developing a "credibility problem" and that markets are showing the kind of steepening yield curve, falling stocks and weaker dollar typically associated with credibility shocks at developing-economy central banks. Stocks fell and bond yields climbed in the aftermath of the Fed's meeting.

Investors are now pricing in at least one quarter-point rate increase before year's end, with CME Group's FedWatch tool putting the odds at 57%. JPMorgan said it still expects the Fed to hold rates steady through 2026 but acknowledged a September hike remains possible depending on incoming inflation data.

Read the full story at moneywise.com.