The bond market is sending a warning to the Federal Reserve. With long-term yields climbing to levels not seen in decades, questions are mounting about the Fed’s ability to control inflation while maintaining market confidence.
Wharton Finance Professor Nikolai Roussanov explains why Kevin Warsh’s recent messaging has unsettled investors and why the Fed’s reaction function may matter more than its guidance on the path of interest rates.
Roussanov also examines the tension between monetary and fiscal policy, including whether Treasury efforts to push down long-term yields could undermine the Fed’s strategy.
As inflation, energy prices and fiscal pressures evolve, the Fed faces a critical test: preserve its 2% inflation target—or risk losing credibility with the bond market.