US Treasury yields edged lower early Thursday after the Federal Reserve held interest rates steady, although uncertainty over the next policy move continued to weigh on bond markets as investors assessed Chair Kevin Warsh’s comments.
At 7:50 AM ET, the 10-year Treasury yield was down 2 basis points at 5.016%. The two-year yield declined 4 basis points to 4.693%, while the 30-year yield slipped 2 basis points to 5.342%.
The moves followed Wednesday’s widely anticipated decision to maintain the federal funds rate within the 3.75% to 4% range.
Fed pause offers limited relief
The Federal Open Market Committee voted 10-2 to leave rates unchanged as policymakers weighed persistent inflation against resilient economic growth.
In its post-meeting statement, the Fed said inflation remained elevated and that additional information would help officials determine the appropriate policy stance to return inflation to its 2% target.
“The Committee will deliver price stability,” policymakers said.
Warsh pushed back against the idea of offering a detailed roadmap for future decisions. “I don’t believe in forward guidance, absent exigent circumstances, absent a crisis,” he told reporters after the decision.
He also said financial and credit conditions had begun to tighten for some businesses and households, as expected, but stopped short of describing conditions broadly as “tight.” Instead, he said they were helping create a path toward price stability.
Despite the pause, markets continued to anticipate further tightening, especially with the decision on Wednesday not unanimous.
The probability of a 25-basis-point rate increase at the Fed’s December 9 meeting stood at 85.7%, according to CME FedWatch data.
Bond investors weigh Warsh’s outlook
Treasury trading reflected differing expectations across maturities after Warsh’s remarks.
Short-term yields fell as investors welcomed the absence of an immediate rate increase, while longer-dated bonds came under selling pressure, pushing their yields higher.
That divergence steepened the yield curve, even as yields subsequently eased across maturities early Thursday.
The spread between longer- and shorter-term yields had widened to 34.1 basis points earlier this month before narrowing in recent weeks.
Investors remain uncertain about how much further monetary tightening may be needed to contain inflation, particularly with energy costs and resilient demand complicating the outlook.
“Investors should prepare for interest rates to remain elevated with the Fed focused on bringing inflation back towards its 2% target,” Phil Blancato, chief market strategist at wealth management firm Osaic, told Reuters.
Economic data in focus
Thursday’s releases could provide further clues on inflation and growth.
The personal consumption expenditures price index, the Fed’s preferred inflation gauge, will be released alongside the advance estimate of third-quarter gross domestic product and personal income and spending data.
The figures could influence expectations for December and the direction of Treasury yields as investors assess whether inflation pressures are easing enough to alter the Fed’s policy outlook.
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