Federal Reserve officials and bond traders signaled a tighter monetary path after strong economic data drove yields across the Treasury curve higher. The 10 year Treasury yield hit 5.081%, the highest level since July 2007, while the 5 year yield crossed 5% for the first time in nearly two decades. This surge follows S&P Global data showing a manufacturing PMI of 57.0, services at 58.7, and a composite index of 58.4, marking the fastest private sector expansion in over five years. Consequently, market participants now price a 68% chance of an additional rate hike in October.

Fed Governor Michael Barr stated that further rate increases will likely be needed to return inflation to the central bank's 2% target, noting that the Fed had been "out of position" prior to a recent 25bp increase. The Fed's current dot plot shows 16 of 18 officials expect at least one more hike in 2026. Inflation concerns are being compounded by a spike in energy and transport costs, which pushed input costs to their highest level since 2022.