Last week, after the Federal Reserve raised its target interest rate for the first time in three years, Wall Street has remained highly vigilant about further tightening of monetary policy. However, market sentiment regarding the timing of rate hikes had been rather ambiguous until yesterday, when the situation became clearer. A speech by a Federal Reserve governor, coupled with business climate survey data, churned the bond market on Wednesday, causing a sharp rise in U.S. Treasury yields and a corresponding increase in the probability of an interest rate hike in the federal funds rate futures market. The double whammy began with the business climate survey data released on Wednesday. As a leading indicator of GDP, the U.S. composite PMI output index rose sharply in September, marking the fastest economic growth in more than five years. The Atlanta Fed's GDPNow model also predicts that total economic output growth will accelerate significantly from the moderate performance of the second quarter in its forecast for the upcoming third-quarter GDP. While this data is generally positive for the economic outlook, the bond market focused on the persistently rising price data in the survey report. The S&P Global PMI report stated, "Price pressures intensified further in September. Combined input costs for goods and services surged, pushing overall inflation to its highest level since October 2022. The cost increases were primarily driven by higher fuel and transportation prices, while wage pressures also rose in many sectors." Chris Williamson, chief business economist at S&P Global Market Intelligence, wrote that rising input costs "will further push up sales prices in the coming months, exacerbating upward pressure on inflation." Shortly after the PMI data release, Federal Reserve Governor Michael Barr spoke at a conference in Chicago, stating, "The Fed will likely need to further adjust monetary policy to push inflation back to target levels in a timely manner." He added, "Current inflation is above the 2% policy target and has not yet shown a clear downward trend. Furthermore, upside risks to inflation have increased, while downside risks to the labor market have subsided." Influenced by this news, bond yields saw an unprecedented rise on Wednesday. The 10-year Treasury yield surged to 5.12%, a new 19-year high. The 2-year Treasury yield, highly sensitive to policy, also rose sharply, closing at 4.90%. The yield spread relative to the effective federal funds rate (volume-weighted median overnight interbank lending rate) is close to 1 percentage point, reflecting a high market expectation of an imminent new round of policy tightening. Pricing in the CME FedWatch tool also reflects this latest shift in expectations: current market pricing indicates a 73% probability of a rate hike at the next FOMC meeting on October 28th. The market will now focus on next week's August Personal Consumption Expenditures (PCE) price index update, the Fed's most closely watched inflation indicator. Wall Street analysts and the Cleveland Fed's real-time inflation forecasting model both predict that year-on-year price growth will remain above 3%, well above the central bank's 2% inflation target. If the actual data meets expectations, it will further corroborate Barr's tightening stance, supporting further monetary policy tightening. Even if the inflation data does support another rate hike, a Fed rate hike before the midterm elections would be a cautiously risky move. This move could bolster the central bank's credibility in combating inflation, but it will also draw criticism: at a crucial juncture when the election is close and multiple polls show the Republicans trailing, the Federal Reserve is deliberately creating headwinds for the economy. For the Federal Reserve, which strives to maintain its independence, the public perception generated by a pre-election rate hike is almost as significant as the policy decision itself.