The bond market kept selling off this past week, pushing the 2-year Treasury yield above 4.1% and leaving it well above the upper end of the Federal Reserve's 3.50%-3.75% target range. The 10-year Treasury yield ended the week above 4.5% after nearly touching 4.7% last Wednesday, a level that showed just how fast investors are rethinking where rates may go next.
Ed Yardeni said the Bond Vigilantes are threatening that if the Fed doesn't tighten credit conditions, they will do so to maintain law and order in the economy. Jamie Dimon told that rates can easily go up more, and credit spreads can go up more. Those warnings landed in a week when markets shifted further away from rate cuts and toward the possibility that the Fed may have to hold steady this year or even tighten a little more.
The move has been dramatic. Markets are now pricing in a 57% chance of at least one rate hike by December, up from 30% a week ago, with the chance of a hike in October sitting at nearly 53%. That is a sharp turn for a market that had spent much of the spring looking for easier policy later this year.
The data feeding that move were hard to ignore. Wholesale prices soared 6% in April. Payrolls grew by 115,000 that month, and March job growth was revised higher by 7,000 to 185,000. The Redbook same-store retail sales index jumped 8.9% for the week ending May 16 after confirming the prior week's 9.6% surge, both readings well above the 2025 full-year average of 5.8%.
That mix matters because it points to an economy that is still holding up while inflation pressures remain sticky. The article says wholesale prices and consumer prices are rising as higher energy costs pass through to consumers, and it also says consumers are still spending. In that setting, the bond market is doing what it often does first: pricing in the risk that the Fed stays firmer for longer.
Philadelphia Fed President Anna Paulson said this past week that the way the market has moved in reaction to economic news over the last few months largely aligns with her own thinking. Paulson, a voting member on the FOMC this year, said inflation is too high and that monetary policy is in a good place now, adding that policy is mildly restrictive and helping keep the effects of tariffs and conflict-related price increases in check. Her comments matter because they suggest the market's sharp repricing is not out of step with at least some Fed thinking.
The tension now is that the same market forces that have pushed yields higher are also doing some of the Fed's work for it. If borrowing costs keep rising on their own, the central bank may get tighter conditions without changing rates at all. But if inflation stays hot and spending stays firm, traders may have to keep entertaining a more uncomfortable possibility: that the next move in policy is not a cut at all.
