Warsh scuttled forward guidance, markets are on their own. However this comes out, it promises to be a rougher ride, but in a fresh breeze.

By Wolf Richter for WOLF STREET.

So would a “surprise rate hike” at the July meeting still be a surprise when the bond market prices it in a week in advance?

Treasury yields rose across the board today. At the long end, fears of inflation and separate fears of an onslaught of new debt reigned: The 10-year Treasury yield rose to 4.71%, the 20-year yield to 5.20%, and the 30-year yield to 5.17%, the latter two near multi-year highs.

But what was really fascinating was the bond market’s reaction with the yield that primarily reflects what will happen at the FOMC meeting on July 28-29: the 2-month yield.

Buyers of securities that mature in about two months today demanded to be paid for the rest of a rate hike at the July meeting that hadn’t already been priced in before today. A mid-September rate hike doesn’t matter to them because their securities will mature by then.

The 2-month Treasury yield spiked by 13 basis points today and by 15 basis points during the week to close at 3.95%, according to Treasury Department’s yield calculation. This is at the upper end of the Fed’s target range after it hikes by 25 basis points (3.75%-4.0%) and 32 basis points above the Effective Federal Funds Rate (EFFR, blue), which the Fed targets with its policy rates. This is a stunning move, pricing in a “surprise” rate hike at the FOMC meeting next week.

The 2-month Treasury yield had also spiked in June 2025 during the Debt Ceiling standoff when the bond market wasn’t sure if the securities that matured in July and August 2025 could be redeemed on maturity date, as the government’s checking account would be running on empty by then, and it couldn’t sell any new debt to raise new funds, and might run out of money, and they wanted to be paid extra to take that risk.

After the Debt Ceiling was resolved on July 4, 2025, and the Treasury Department began selling Treasury bills successfully by the train-load to raise the funds needed to stay in business, the 2-month yield settled back down.

The 3-month Treasury yield, which rose by 6 basis points today and by 10 basis points during the week, also to 3.95%, according to Treasury Department data, also prices in a rate hike.

But its window includes the September FOMC meeting, and so a rate hike either at the July meeting or at the September meeting would be priced in, but not two rate hikes.

This is a new era at the Fed. Warsh has scuttled forward guidance. He has been silent about rate hikes but adamant about inflation being too high, and about the Fed having some work to do. Other FOMC members have spoken in favor of rate hikes.

The participants in the Treasury market are now left to their own devices, they can no longer look at the Fed for guidance, they have to dig through and digest the data on their own – and as Warsh said, the huge bond market is very good at it – and they have to come up with their own conclusions as to the yield they want to be paid to buy these securities.

Warsh said that the Fed would use the bond market’s signals as one of the key inputs in the Fed’s monetary policy decisions. So today, the bond market provided the signal.

The Fed hasn’t sprung a true “surprise” rate hike on the markets in eons, maybe not since 1994 under Greenspan, an intermeeting rate hike at that, and it started a tightening cycle.

Warsh has taken Greenspan as a model, in terms of reducing communications, leaving markets to their own devices without forward guidance, and prioritizing the price stability mandate over the employment mandate.

There is a chance the bond market is getting it wrong, or that the Fed will be ignoring the signals from the bond market and not hike in July, or that the bond market will change its mind tomorrow and walk back those rate hike expectations. However this comes out, it promises to be a rougher ride, but in a fresh breeze.

Enjoy reading WOLF STREET and want to support it? You can donate. I appreciate it immensely. Click on the mug to find out how: