The Federal Reserve's decision will be officially announced at 2 p.m. Eastern Time on Wednesday. With the decision date approaching, the Fed still has two technical options, but from a market perspective, holding rates steady is becoming increasingly unlikely. The market is currently pricing in a greater than 90% probability of a 25 basis point rate hike, and the 10-year Treasury yield has broken through 5%, the first time since 2007. This combination reveals the pressure points ahead of the decision: investors are not only worried about inflation itself, but are also beginning to question the Fed's seriousness in dealing with inflation. If the Fed ignores these signals, the risk is that the market will interpret it as an unwillingness to confront inflation, rather than patience. A potentially undesirable outcome would be no rate hike, but long-term borrowing costs still rising. Some institutions warn that if the Fed holds rates steady, the 30-year Treasury yield could quickly jump to 5.75%.

Market pricing: Over 90% probability of interest rate hike; 10-year US Treasury yield breaks 5%.

The market is highly aligned in pricing in a Fed rate hike, with a greater than 90% probability of a 25 basis point increase. Meanwhile, the 10-year US Treasury yield broke through the 5% mark for the first time since 2007. This combination of interest rate and policy expectations clearly reveals the immense pressure the market is under ahead of the decision. Investors' core concern now extends beyond high inflation itself; they are further questioning whether the Fed is prepared to respond to persistent price pressures with sufficient seriousness and decisiveness. Current pricing reflects the market's high sensitivity to policy credibility: if the central bank hesitates in the face of such clear signals, it could be interpreted as an underestimation of inflation risks. The 10-year yield breaking through a key psychological level also amplifies the feedback effect of long-term interest rates on the policy path, making this decision far more important than usual. Overall, the market has priced in a rate hike as the baseline scenario, and any deviation could trigger significant volatility.

Background data: Inflation remained stubborn in August, oil prices broke through $100, and long-term yields soared.

August inflation data reaffirmed that price pressures in the US remain stubbornly persistent, with core indicators showing no signs of significant easing. Meanwhile, international oil prices, well above $100 per barrel, further pushed up energy-related costs and inflation expectations. Against this backdrop, long-term US Treasury yields have surged to levels rarely seen in nearly two decades, reflecting market concerns about both inflation stickiness and policy responses. If the Federal Reserve chooses to ignore these clear signals at this juncture, investors are likely not to interpret it as "patiently waiting for more data," but rather as a sign that the central bank is unwilling to confront the reality of inflation. This interpretation is particularly crucial for the long-term yield curve, as long-term interest rates are directly related to corporate investment, the housing market, and overall financial conditions. The mutually reinforcing data and market performance have heightened the tension in the macroeconomic environment leading up to this decision and increased the potential costs of policy communication missteps.

The risk of remaining inactive: Short-term prices decline while long-term prices rise.

If the Federal Reserve ultimately chooses to hold rates steady, the 2-year yield may initially decline after the decision, reflecting the immediate reaction of short-term investors to the easing signal. However, the 10-year and 30-year yields are likely to move very differently. The crux of the issue is that the market reaction may be more inclined to demand additional compensation to address the risks of rising inflation uncertainty and damaged policy credibility. Therefore, the term premium is likely to rise. If this happens, a rather unpleasant outcome could occur: the Fed hasn't raised rates, but long-term borrowing costs are still rising. In this scenario, even if the Treasury continues its repurchase operations, it will be difficult to effectively solve the problem. It's worth noting that after the release of the August CPI report, the market has significantly increased the probability of a September rate hike. In other words, the bond market has effectively shifted to demanding a more orthodox monetary response—if inflation proves sticky, the central bank should fulfill its duty and tighten policy promptly. Holding rates steady may actually exacerbate long-term pressures.

The Federal Reserve's dilemma: raising interest rates carries risks, but not raising rates carries even greater risks.

The Federal Reserve has placed itself in a difficult dilemma. While raising interest rates poses obvious risks to economic growth and financial markets, potentially dampening investment and consumption and triggering asset price volatility, the signal sent by choosing not to raise rates could be far worse, given the current macroeconomic backdrop and the market's overwhelming pricing of interest rate expectations. This is not merely a matter of a slight or gradual increase in long-term yields. Some analysts believe that if the Fed decides to hold rates steady, the market reaction could be quite violent, even chaotic. The danger extends far beyond a 5 or 10 basis point rise in long-term yields. Some institutions have explicitly warned that if the decision remains unchanged, the 30-year yield could quickly jump to as high as 5.75%. This potential scenario adds further complexity to the situation facing the Fed before its decision and highlights the critical importance of policy credibility and market expectation management. The cost of not raising rates may far outweigh the short-term impact of a rate hike itself.

In conclusion, the market has made its choice for the Federal Reserve; the cost of not raising interest rates may be higher.

In summary, the Federal Reserve technically still has two options: raising interest rates or holding steady. However, market forces have significantly reduced the latter's room for maneuver. A rate hike probability exceeding 90%, the 10-year yield breaking 5%, oil prices exceeding $100, and persistent August inflation all combine to create an environment where the market demands a legitimate monetary response. If the Fed chooses to hold steady, short-term yields may decline temporarily, but long-term yields could surge due to rising term premiums, even exhibiting disorderly movements; the 30-year yield could potentially jump to 5.75%. In this context, the market cost of not raising rates may be higher than that of raising them, and the Fed's options have been significantly narrowed by the market.