A hot war, a trade war, a bad harvest, a snarl in shipping. Supply shocks have come so often over the past six years, KPMG chief economist Diane Swonk told Fortune, that they’ve started to sound like a drumbeat.
“With a drumbeat you get a rhythm,” she said, “and with the rhythm you learn.”
Households and businesses have learned to brace for the next price shock; but the bond market started pricing it in this week. The 10-year Treasury yield touched 4.92% on Thursday, its highest level since 2023 and just shy of the 5% red line feared by Wall Street. Treasury Secretary Scott Bessent’s attempts to strong-arm the bond market have been drowned out by the Iran war’s steady drumbeat, with oil back above $100 a barrel. Now Fed funds futures put the odds of a rate hike next week at roughly 75%, but the bond market, taking Fed Chair Kevin Warsh’s advice, isn’t waiting to play referee; it’s playing the ball.
Swonk’s fear is that letting the bond market do that tightening only makes the problem worse.
The bond market will overshoot, she said, because investors will demand more of a premium if they begin to doubt the central bank’s willingness to contain inflation. “The Fed controls the short end,” she added. “The bond vigilantes control the long end.”
