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Long-term US Treasury yields reach a 19-year high—why can't Waller's "hawkish rhetoric" win market trust?

Long-term US Treasury yields reach a 19-year high—why can't Waller's "hawkish rhetoric" win market trust?

金融界金融界2026/08/03 07:02
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By:金融界

Last Wednesday (July 29), Federal Reserve Chair Walsh stated unequivocally that he would curb inflation but gave no signal of a rate hike, triggering a massive sell-off in the bond market. The 30-year US Treasury yield broke through 5.2%, reaching a 19-year high. Although Trump canceled the planned attack on Iran over the weekend and oil prices fell sharply, slightly alleviating inflation concerns, the 30-year Treasury yield only retreated slightly and remains high; the 10-year Treasury yield fell by 4.6 basis points to 4.69%.

This stance may also force him to face a tough decision: whether to go against Trump’s push for looser monetary policy, or clash with an increasing number of hawkish Federal Reserve colleagues advocating for tightening.

What troubles the market even more is that Walsh hinted at a possible adjustment to the Federal Reserve’s standard for considering inflation under control — for years, the Fed has used the 2% year-over-year PCE Price Index as the inflation target — raising doubts about the Fed’s determination to fight inflation.

The market sell-off is a “no-confidence vote” on the Federal Reserve

On one hand, Walsh stresses the need to curb inflation, while on the other he has taken no actions to push inflation back towards the 2% target and simultaneously suggests the target itself may be adjusted, together driving long-end Treasury yields higher.

Citi Group’s Global Chief Economist stated: “Within the Federal Reserve, this situation is almost viewed as the market casting a ‘no-confidence vote’ against the Fed’s willingness and ability to bring down inflation.”

He pointed out that Walsh identified the problem but did not provide a solution—“just saying ‘I’m hawkish, trust me’ isn’t enough for the market.” He believes Walsh must make a choice before September, especially after the “serious warning sign” of long-term yields rising.

Meanwhile, short-term Treasury yields fell; currently, the 2-year Treasury yield dropped 4.5 basis points to 4.25%. Investors are lowering their bets on Fed rate hikes under Walsh’s leadership.

Three hawkish committee dissent votes reveal internal divisions

Last Wednesday, among the 12 Federal Reserve voting members, three opposed keeping rates unchanged and advocated for a 25-basis-point hike.

Dallas Fed President Logan warned: “Without any policy constraint, inflation is likely to remain above target.”

Minneapolis Fed President Kashkari said: “A series of small policy adjustments is better than waiting and seeing.” Cleveland Fed President Harker added bluntly: “Now is the time to act.”

Additionally, officials who supported standing pat—including Governors Waller and Cook—have also said they might support a rate hike if inflation does not improve.

SGH Macro Advisors’ Chief US Economist pointed out that Fed Governors have “sent a clear signal to Walsh: if inflation does not significantly cool this summer, they intend to push for a rate hike in September.”

Mixed economic data

In June, the PCE Price Index year-over-year fell from 4.1% in May to 3.7%, with core PCE dropping from 3.4% to 3.3%, indicating some cooling in inflation.

However, Q2 corporate equipment spending grew at 15.2%, marking the second consecutive quarter of double-digit growth and signaling ongoing economic resilience.

This set of data makes the Fed’s policy path more complicated—cooling inflation justifies holding steady, but strong capital expenditure provides hawks with arguments for a rate hike.

Walsh’s “September decision”

The surge in long-term Treasury yields reflects market doubts about his determination to fight inflation, the dissenting votes of three hawkish committee members reveal deep divisions within the FOMC, while pressure from Trump for rate cuts further restricts policy space. Walsh must decide before the September meeting: either adjust the inflation target framework to buy more time, or heed the calls of hawkish committee members and raise rates to maintain anti-inflation credibility.

For the market, no matter which option is chosen, it means the Fed is stepping into a period of highly uncertain policy. As a former Fed economist said, “Walsh identified the problem but didn’t provide a solution—the market needs far more than that.”

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Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.

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