Long-term US government borrowing costs climbed to their highest level since 2007 after the Federal Reserve left interest rates unchanged for a fifth consecutive meeting, highlighting mounting investor concerns that rising oil prices and geopolitical tensions could fuel a prolonged wave of inflation.
The yield on the 30-year US Treasury rose as much as 14 basis points to 5.23%, its highest level in nearly two decades, following the Fed’s decision to maintain its benchmark interest rate at 3.5% to 3.75%. The yield remained elevated at around 5.22% on Thursday, reflecting persistent concerns over the inflation outlook.
Federal Reserve Chair Kevin Warsh defended the decision, arguing that tighter financial conditions brought about by rising bond yields had effectively delivered additional monetary tightening without requiring another rate increase.
“Financial market prices… reacted to the inflation data in one direction, strong economic growth in the other direction, and nominal and real rates went up,” Warsh said after the policy meeting, adding that the central bank would not “waver” in its commitment to returning inflation to its 2% target.
Despite the Fed’s stance, financial markets interpreted the decision as increasingly hawkish. Several economists argued that the central bank failed to adequately explain why it chose not to raise rates despite persistent inflation risks.
The rise in borrowing costs weighed heavily on equity markets. The S&P 500 fell 1.5%, while the technology-heavy Nasdaq 100 dropped 2.1%, as higher bond yields reduced the attractiveness of growth stocks. European government bond markets also weakened, with yields on German Bunds and UK gilts moving higher in sympathy with the US sell-off.
US Inflation stood at 4.1% in May, more than double the Federal Reserve’s long-term target, underscoring the difficult balancing act facing policymakers. Analysts say the central bank must now weigh the risks of tightening monetary policy further against the danger of allowing inflation expectations to become entrenched.
