05/28/2026
The Fed hasn't hiked, but the bond market may have already done some of that work for them.
Bloomberg Economics' Anna Wong and Björn van Roye ran simulations using their Global SHOK model, which suggest the tightening in financial conditions from the 10-year Treasury yield's 50 bp surge since the start of the Iran war could be equivalent to roughly 75 basis points of Fed rate hikes.
Their estimates suggest roughly 35 of those 50 basis points have come from a rise in the term premium rather than from markets pricing in stronger growth or higher inflation expectations. A term premium-driven yield increase tends to tighten financial conditions directly, likely raising borrowing costs for households and businesses, without necessarily signaling a stronger economy underneath.
That's the substitution effect. The bond market may have done some of the heavy lifting so the FOMC doesn't have to.
For incoming Fed Chair Kevin Warsh, this could be good news in disguise. Despite pressure from the White House for lower rates and a likely hawkish bloc on the FOMC, the bond market may have already tightened enough to argue for patience rather than action.
Source: Bloomberg Economics (Anna Wong & Björn van Roye)
