"Fed" indirectly raises interest rates by 75 basis points: On Nonfarm Payroll Week, Wall Street stands at a crossroads

The bond market has written an 'interest rate hike notice' in yields — although the Federal Reserve has not yet acted, the financial environment has quietly tightened by the equivalent of 75 basis points.

This is not a metaphor. According to statistics, since the outbreak of the US-Iran conflict, the surge in US Treasury yields has tightened financial conditions to an extent equivalent to the Fed directly raising interest rates by 75 basis points. The 10-year Treasury yield stands at about 4.44%, and the 2-year at about 4%, up roughly 50 and 60 basis points respectively since the end of February. Catrambone, head of fixed income at DWS, bluntly stated: 'US Treasury yields have risen, which increases the tightness of the US economy and acts like a Fed interest rate hike.'

The market narrative has completely flipped. Traders who at the beginning of the year were betting on 'Wools will quickly cut rates after taking over the Fed' are now pricing in rate hikes by mid-2027 or even earlier. Swap markets have fully priced in a 25-basis-point hike by the end of the year, and short-term Treasury yields have even risen above the current 3.5%-3.75% policy rate range. In just a few weeks, the global bond market has completed a historic re-pricing of expectations from 'when will rates be cut' to 'whether rates will be raised.'

Fed officials are collectively 'turning hawkish,' fanning the flames of this covert rate hike. New Chair Wools has not yet chaired his first policy meeting, yet officials are already racing to make statements. Kashkari said that inflation has been above target for five consecutive years and that a 'more aggressive policy response' is necessary; Goolsbee warned that energy inflation may last longer than expected; Governor Cook issued the strongest signal — 'I am ready to hike if expected inflation cooling does not materialize as planned.' Vice Chair Jefferson, while not directly threatening rate hikes, explicitly refused to preset a timeline for the next rate cut. The hawkish camp has gained overwhelming dominance.

The real showdown comes this week. The May nonfarm payroll report released on Friday is the key variable determining the Fed’s next move. The market expects an increase of about 90,000–100,000 jobs, with the unemployment rate holding at 4.3%. If the data meets or even exceeds expectations, the average job gains over the past three months would reach the highest level in more than a year, further heating up expectations for rate hikes. AmeriVet’s head of rates trading, Faranello, warned: 'If inflation remains high and job growth remains strong, a single rate hike will be insufficient.'

But data is not the only uncertainty. The US PCE price index in April rose 3.8% year-on-year, and core PCE rose 3.3% year-on-year, both hitting temporary highs. First-quarter GDP was revised down to 1.6%, as weak consumption coexists with high inflation, a typical 'mild stagflation' pattern. Moody’s Chief Economist Zandi bluntly stated: 'The US economy is not just weak; it is struggling.'

Geopolitics is the biggest uncertain factor in this game. The US and Iran have reached a temporary agreement on a 60-day ceasefire, but there is still no concrete commitment to reopen the Strait of Hormuz. ING analysts clearly pointed out that for the dollar to decline further, 'the Strait of Hormuz truly needs to reopen.' If the ceasefire agreement ultimately breaks down, the probability of a rate hike in 2026 will rise significantly. Deutsche Bank believes that even in a peaceful scenario, the risk of rate hikes still exists—the neutral interest rate may be higher than expected, and inflation stickiness could exceed expectations.

For investors, there is only one core strategy this week: wait. Before the non-farm payroll data is released, any direction is a gamble. But one thing is certain: the fantasy of rate cuts has been shattered, and the Federal Reserve is being pushed into a corner it does not want. As the 'New Bond King' Gundlach said—the two-year US Treasury yield indicates that the Fed may need to hike rates.

At Wall Street’s crossroads, the red light has turned on.