How have Treasury yields, US stocks performed ahead of FOMC decision?

The latest US consumer price index data bolstered concerns that the Fed’s latest efforts to bring inflation back to its 2 per cent target might take longer than expected. Rising energy costs pushed the rise in the headline CPI figure to 3.7 per cent in August, above economists’ expectations. A measure of the dollar’s strength against six other currencies slid 0.1 per cent.

Wall Street’s S&P 500 closed 0.2 per cent lower, with energy and industrials ranking as the benchmark’s worst-performing sectors. The tech-heavy Nasdaq Composite also fell 0.2 per cent.

US yields hit a 16-year high ahead of the conclusion of the Federal Reserve’s policy meeting on Wednesday, at which the central bank is expected to hold rates steady, but may indicate its willingness to keep monetary policy tighter for longer.

The benchmark 10-year Treasury yield reached a session high of 4.371 per cent, its highest level since early November 2007. The five-year Treasury yield also reached a 16-year high of 4.524 per cent, while the yield on the two-year note hit a two-month high of 5.114 per cent.

Treasury yields, which move inversely to price, track interest rate and inflation expectations.

Tuesday’s jump indicated that traders expected Fed chair Jay Powell to signal the central bank’s willingness to keep interest rates higher for longer.

Though Fed officials have signalled they are concerned about the risks of over-tightening monetary policy, mixed data from the US, including a recent jump in headline inflation, has complicated the central bank’s job. In the Fed’s “dot plot” — its economic and policy projections for the coming year — to be released tomorrow, officials may indicate they expect to keep interest rates at high levels for longer.

Markets are pricing in a 99 per cent chance that interest rates will remain unchanged on Wednesday, but traders have roughly 50-50 odds on the chances of rates then being lifted by the end of the year.

Reflecting the fight central bankers still have on their hands to tame price pressures, the deputy governor of the Bank of Canada on Tuesday said the central bank was prepared to end its recent pause on monetary policy tightening and “raise the policy interest rate further if needed”.

The UK, Switzerland and Japan are among the other countries whose central banks will announce policy decisions this week.