BOND MARKET SIGNALS FED MUST RAISE RATES ON INFLATION

The Federal Reserve left its benchmark interest rate unchanged at a range of 3.5% to 3.75% following its latest policy decision, a move that was widely expected. Three policy members dissented, favouring a quarter percentage point rate increase. Fed Chairman Kevin Warsh stated the Fed will take necessary steps to meet its 2% inflation goal. Jeffrey Gundlach, chief executive of DoubleLine Capital, said the Treasury market is signalling the Fed will need to act beyond rhetoric if it intends to reach that target.

Gundlach observed divergent movements across the Treasury curve following the announcement. The two-year Treasury yield fell 3 basis points to 4.244%, which he attributed to investor belief that the Fed is delaying action. The 10-year Treasury yield rose more than 7 basis points to 4.681%, whilst the 30-year bond yield surged to 5.213%, its highest level since 2007. Gundlach characterised this as the bond market signalling scepticism about the Fed's commitment to inflation control, stating: "If you really want us to believe your rhetoric, you've got to start acting."

Gundlach assessed that reaching the 2% inflation target would require rate increases and may take several years. He suggested the Fed may not achieve the target within the next couple of years. The movement in long-duration bond yields, which are generally tied to inflation and deficit expectations, indicates investors view the Fed's current policy stance as insufficient to address inflation concerns.