The bond market did the talking on Monday. The yield on the 10-year Treasury note pushed above 4.75% for the first time since January 2025, extending a selloff that has run for four straight sessions and dragged five-year yields to their own highest level since early last year.
The proximate cause was oil. Key crude benchmarks rose more than 3%, hitting session highs during US morning trading after President Donald Trump threatened Iran with additional attacks. But the deeper driver is a Federal Reserve that has spent the past three days telling markets it is prepared to tighten.
Hike Odds Keep Climbing
Traders of fed funds futures now assign a 60.4% probability to a quarter-point increase at the September 16 meeting, according to CME's FedWatch tool — up from roughly 56% on Friday and about 40% a week ago. The repricing began with Fed Chair Kevin Warsh's Jackson Hole address, where he acknowledged that recent inflation prints have been soft but argued the improvement does "not tell me that underlying trends have meaningfully improved."
Deutsche Bank called the speech a surprise. "Chair Warsh's Jackson Hole address surprised us in its specificity about the economy and outlook and with its lean in a decidedly hawkish direction," the firm wrote, and it now expects 50 basis points of tightening this year, split between the September and December FOMC meetings.
James Ooi, market strategist at Tiger Brokers, noted that Warsh's characterization of US economic performance as robust "was seen as reducing the case for near-term rate cuts."
The Treasury Secretary Disagrees
What makes this episode unusual is that the administration is arguing the other side in public. Speaking to CNBC on Monday from the G20 summit in Asheville, North Carolina, Treasury Secretary Scott Bessent pushed back directly on the logic of hiking into an energy shock.
"It is my belief that we've seen a supply shock, and traditionally you don't raise into a supply shock unless you see second- or third-order effects," Bessent said. "And we are seeing the core inflation has remained very, very restrained."
He is not alone. David Kelly, chief global strategist at JPMorgan Asset Management, said recent data suggests "the economy doesn't have quite as much momentum as Kevin Warsh suggested in his Jackson Hole speech," adding that markets "may have been premature" in pricing a 60% chance of a September move and that there is "little in the labor market to suggest inflationary trouble ahead."
On the other side, Kristina Clifton, senior economist at Commonwealth Bank of Australia, said the bank has "brought forward the start of the Fed's tightening cycle and now expect a September interest rate increase."
Equities Take the Hit
Higher yields left equities with nowhere to hide. The Dow Jones Industrial Average fell 464 points, or 0.9%, to close at 53,885.10, snapping a five-day winning streak. The S&P 500 slipped 0.3% to 7,711.76 and the Nasdaq Composite eased 0.5% to 26,402.42 on soft AI-linked names.
Small caps fared worst, as they typically do when financing costs jump: the Russell 2000 dropped 0.9% to 2,947.
With 16 days until the FOMC decision, the market's central question is no longer whether the Fed is thinking about hiking. It is whether the incoming data gives Warsh enough cover to do it over the Treasury's objection.
Sources: Bloomberg, CNBC, Yahoo Finance, Trading Economics, CME FedWatch