Treasury yields approach highs, Warsh faces the test: one sentence could steady the bond market

BlockBeats News, September 9 — As the U.S. fiscal deficit, inflationary pressures, and the AI funding wave continue to push up long-term financing costs, pressure in the Treasury market has intensified. What the market is truly waiting for may not be the Federal Reserve restarting quantitative easing, but rather Chairman Kevin Warsh further clarifying his policy "reaction function."

Recently, global bond yields have continued to climb, with the 10-year Treasury yield currently around 4.80%, near its highest level since 2025. Meanwhile, market expectations for future Fed rate hikes have risen, and investors are also concerned that the U.S. fiscal deficit and corporate AI infrastructure funding needs will further push up long-term yields.

Warsh previously stated at the Jackson Hole symposium that more work remains in the fight against inflation, which the market interpreted as signaling the possibility of future rate hikes. The market currently prices in roughly a 60% probability of a rate hike next week, and if it materializes, it would mark the first increase in over three years.

Analysts point out that what the bond market lacks is a clear explanation of the Fed's "reaction function" — namely, which economic indicators the Fed monitors, how it weighs inflation against growth risks, and what changes would prompt it to adjust policy. More explicit policy communication would help reduce investor uncertainty regarding inflation and the monetary policy path.

In contrast, although the Fed holds a balance sheet of approximately $6.7 trillion and can influence long-term rates through quantitative easing, the market generally believes the likelihood of Warsh restarting QE is low. Warsh has previously criticized large-scale asset purchases for potentially distorting wealth distribution and has emphasized the importance of Fed independence.

Therefore, against the backdrop of fiscal deficits, inflation, and the AI funding wave jointly driving up long-end yields, a more realistic choice for the Fed may not be to deploy its balance sheet again, but rather to convince the market through clearer policy communication that: once inflationary pressures persist, the Fed will take action.