Finance
Warsh Hiked and the Bond Market Answered: the 10 Year Closed Above 5 Percent for the First Time Since 2007
The Federal Reserve raised interest rates on Wednesday for the first time in more than three years, voting unanimously to lift its benchmark lending rate by a quarter point to a range of 3.75 percent to 4 percent. Chair Kevin Warsh said three things changed since the Fed's July meeting: the economy strengthened, inflation stayed elevated, and geopolitical tensions intensified. CNN reported the decision on September 16.
Inflation remains the center of the story. Warsh said the Fed's predominant focus stays on the price stability side of its mandate, and the official statement said the move would support a timelier return to the 2 percent goal. Annual inflation as measured by the PCE price index has trended closer to 4 percent than 2 percent in recent months. New economic projections penciled in another rate hike by year end, and 2027 is expected to bring a pause in the hiking cycle. Warsh again declined to submit projections of his own, continuing his refusal to offer forward guidance.
The bond market delivered its own verdict. The yield on the 10 year Treasury rose above 5 percent again on Wednesday, reaching its highest closing level since 2007. Warsh offered an upbeat read on the move: the run up reflects a stronger economy, geopolitical pressures, and real competition for capital. 'The so called hyperscalers are out in the market raising funding, so the competition for capital is real, and it partly explains the increase in yields,' he said.
That framing puts the AI buildout at the center of monetary policy. New York Fed President John Williams said earlier in the month that rising yields reflect 'a strong U.S. economy and a strong economic outlook fueled by big investments in AI and data centers and technology in general.' Warsh has created an AI task force, including Stanford economist Charles Jones, on leave at Anthropic, Asha Sharma, executive vice president and CEO of Microsoft's Xbox, and venture capitalist Marc Andreessen, to report by year end on AI's implications for the economy and future policy.
The decision lands against a resilient economic backdrop. Unemployment held at 4.1 percent, job growth picked up sharply in August, and Americans stepped up retail spending sharply last month. Warsh framed the hike as a sign of strength: the economy is sturdy enough to handle higher rates. The politics were pointed but contained: President Trump posted 'LOWER THE INTEREST RATES FOR THE UNITED STATES OF AMERICA, AND FAST!' while stopping short of criticizing Warsh, and National Economic Council Director Kevin Hassett said the president will accept the hike.
For crypto, the morning told its own story. Bitcoin traded near $75,491 in early European trading on Wednesday, a near four week low after falling about 4 percent the previous day on the Senate's rejection of the Clarity Act. Yet holding the $75,000 to $76,000 area through a rate hike and 5 percent Treasury yields signals underlying demand, as Zaye Capital Markets' Naeem Aslam noted. One hike with a pause could let prices steady; the path of further hikes is the variable to watch.
Readers should take the day's signal from the bond market as much as from the Fed. Warsh hiked because the economy could take it, and yields rose because growth and AI investment are competing for every dollar of capital. That is a strong economy story with a high price tag attached, and assets that thrive on liquidity, from tech stocks to bitcoin, will keep watching the 10 year as closely as the Fed funds rate.
Sources
New to crypto? Read the crypto glossary, browse frequent questions, read our story, or explore the story archive.