Powell holds interest rates steady, triggering a sell-off in US Treasuries; the market tightening effect may exceed that of a 25 basis point rate hike.

Last week, Federal Reserve Chair Kevin Warsh decided to hold interest rates steady, triggering sharp volatility in the bond market. A senior bond fund manager argued that the Fed’s “wait-and-see” approach actually delivered a stronger financial tightening effect than an actual rate hike via market reactions. Eric Hickman, founder of Lantern Capital, said that after the Fed’s interest rate decision and Warsh’s press conference, as of last Friday’s close, the combined market value of U.S. Treasuries, notes, and bills across all maturities had shrunk by roughly $115 billion. Hickman estimated that if the Fed had opted for a 25 basis point rate hike that week, with yields on bonds maturing in under five years rising by the same 25 basis points, the bond market would have lost around $65 billion in an extreme scenario—less than the losses from the actual volatility. He believes Warsh achieved a stronger tightening effect by not directly raising policy rates but instead letting the market reprice assets, while avoiding committing to keeping rates elevated for an extended period. Data shows that last Friday, the yield on the 30-year U.S. Treasury climbed to 5.229%, a nearly 19-year high; the 10-year U.S. Treasury yield rose to 4.688%, its highest level since January 2025. Hickman noted it remains unclear whether Warsh deliberately used market reactions to tighten policy, but Warsh has long advocated reducing forward guidance and letting the market digest economic information on its own—a philosophy clearly reflected in this policy move. However, internal divisions exist within the Fed. St. Louis Fed President Musalem stated that monetary policy responsibility lies with the FOMC, not financial markets, signaling concerns about the approach of “achieving policy effects through market adjustments.”