US borrowing costs hit 19-year high as Fed holds interest rates

The cost of borrowing for the US government has surged to its highest point since 2007, following the Federal Reserve's decision to maintain its benchmark interest rate. The yield on 30-year US Treasury bonds climbed 14 basis points to almost 5.24%, a level not seen in nearly two decades.

This move by the Fed, holding rates between 3.5% and 3.75% for the fifth consecutive meeting, has fueled investor concerns. They fear the central bank might be too slow in its efforts to curb rising inflation. Adding to the unease are escalating oil prices, driven by renewed conflict between the US and Iran.

Fed Chair Kevin Warsh asserted the bank's unwavering commitment to fighting inflation, stating, "There is only a target and it's 2%. This Fed will not waver." He dismissed the idea of an implicit inflation target above the official 2%, emphasizing the central bank's credibility rests on fulfilling its responsibilities.

Despite Warsh's assurances, some economists question the Fed's strategy. Felix Schmidt, a senior economist at Berenberg, noted that Warsh did not definitively explain why the Fed opted against a rate hike. Schmidt suggested that Warsh might be relying on the increased market interest rates to help control inflation temporarily while the Fed under new leadership considers its next steps.

Financial markets had anticipated a higher probability of a rate increase. Following the Fed's decision, traders significantly reduced the perceived chance of a September rate hike. US stock markets reacted negatively, with major indices like the S&P 500, Dow Jones Industrial Average, and Nasdaq all experiencing sharp declines on Wednesday.

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There is only a target and it's 2%. This Fed will not waver … Our credibility rests on performing our duties and delivering on our responsibilities.