Bond traders are maintaining their expectations for the Federal Reserve to raise interest rates before the end of the year. This sentiment persists even after a recent report indicated a softer-than-expected US core inflation reading, which initially eased pressure on Chairman Kevin Warsh for immediate action.
While Treasury yields saw a temporary dip following the release of the inflation data, they later resumed an upward trend, aligning with increasing oil prices. Interest-rate swaps, a key market indicator, are currently fully pricing in a rate hike by December.
Federal Reserve Bank of Minneapolis President Neel Kashkari has vocalized the need for the central bank to incrementally raise interest rates now to combat what he describes as persistent inflation. He stated on August 5, 2026, that "Now is the time to start slowly moving up as we get more data in."
In June 2026, US inflation accelerated, with the consumer price index climbing 0.5% from April and 4.2% from a year earlier, the highest rate since early 2023. This was largely driven by energy prices, which surged due to the Iran war. However, an underlying measure of inflation, excluding volatile food and energy costs, rose a more modest 0.2% from the previous month.
The $31 trillion Treasury market has been signaling the need for higher rates, with yields on policy-sensitive US two-year notes surging to their highest levels in over a year. This indicates that traders are pricing in at least a quarter-point rate hike as early as October, with the two-year yield trading well above the Fed’s current policy band of 3.5% to 3.75%.
