Fed's Rate Hiking Cycle Could End Amid Rising Long-Term Treasury Yields

The ongoing surge in long-term Treasury yields might be signaling the end of the Federal Reserve’s unprecedented rate hiking cycle.

According to a Wall Street Journal report, key officials from the central bank have indicated that the rise in short-term interest rates could be halted if long-term rates continue to hover around their recent highs and inflation keeps decelerating.

In July, the Federal Reserve boosted its benchmark federal funds rate to a range of 5.25%-5.5%, the highest in 22 years. Despite holding rates steady during their last meeting, officials suggested they were prepared to raise rates at one of their final two meetings this year.

The increase in Treasury yields began following the Fed’s rate rise in July and gathered momentum after the September Fed meeting.

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The 10-year Treasury yield was down to 4.654% on Tuesday from 4.783% on Friday, after investors flocked to the safety of bonds due to the attack on Israel by Hamas. However, yields have risen from 4.346% on Sep 20, the day of the last Fed meeting, and 3.850% on July 26, the day of the previous Fed rate increase.

The Fed uses rate hikes to counteract inflation by slowing economic activity, and these changes are primarily reflected in financial markets. Higher borrowing costs lead to reduced investment and spending, which is further exacerbated when higher rates also pressure stocks and other asset prices.

If the surge in the 10-year Treasury yields to their highest levels since 2007 persists, these increases could replace further rises in the fed-funds rate.

“If long-term interest rates remain elevated because of higher term premiums, there may be less need to raise the fed-funds rate," said Dallas Fed President Lorie Logan, a key vote holder in the Fed’s rate-setting committee, on Monday.

Further, officials from the Fed are expected to maintain rates at their Oct. 31-Nov. 1 meeting. Then, they could wait to see how economic and financial developments unravel next month before deciding whether to raise rates in December.

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