Soaring U.S. Treasury yields still won't make the Fed back off? FOMC voter Hammack challenges the "two illusions," adding further uncertainty to the rate hike endpoint.

Title context: Soaring U.S. Treasury yields still won't make the Fed back off? FOMC voter Hammack challenges the "two illusions," adding further uncertainty to the rate hike endpoint. Text: Beijing time in the early hours of October 13, 2026 FOMC voting member and Cleveland Fed President Beth Hammack once again signaled a hawkish monetary policy stancenamely that Fed officials, rather than waiting and then being forced into a large correction of the inflation trajectory, would prefer to adjust monetary policy early and in small increments when conditions allow. In her latest speech, she did not explicitly support an October rate hike, but the sharp rebound in oil prices, persistently elevated diesel spreads, and 10-year and 30-year long-term U.S. Treasury yields hovering near their highest levels in more than two decades are testing the market's dovish camp expectation that "the Fed will pause rate hikes in October and complete this tightening cycle shortly thereafter." The two dovish logicsthat "the bond market is raising rates on behalf of the Fed" and that cooling oil prices will allow the Fed's monetary tightening process to concludehave encountered major challenges. However, regarding expectations for the Fed's October monetary policy action, recent market rate hike pricing still leans toward the Fed's FOMC holding steady in October after announcing a 25-basis-point hike as scheduled in September. The rate hike probability for October shown by interest rate futures market traders' pricing is only about 20%, though it has warmed somewhat compared with the rate hike pricing probability before Hammack's latest hawkish remarks. Fed voter Hammack breaks the "dovish illusion": smaller, more frequent rate adjustments are preferable Cleveland Federal Reserve Bank President Beth Hammack said that adjusting Fed monetary policy in smaller increments and more frequently helps keep inflation expectations stable, but she did not explicitly support a rate hike this month. Hammack said on Monday local time in remarks prepared for the National Association for Business Economics annual meeting in Cleveland: "Where feasible, I generally think it is better to make smaller adjustments and act relatively quickly than to wait and watch for a period and risk needing a larger correction later." Fed officials voted unanimously to raise rates last month to address elevated inflation. Policymakers broadly believe that rate hikes are necessary to curb price pressures reignited by the Iran war and AI-related demand. The Cleveland Fed president, who holds an FOMC monetary policy vote this year, said inflationary pressures are not limited to the energy sector. She pointed out that higher tariffs, as well as increased demand for electricity and technology components driven by AI computing infrastructure construction, and the surge in debt issuance related to AI infrastructure, are all generating inflationary effects. Hammack said earlier this month that before the next meeting on October 27-28, Fed officials still have more information to assess, including the latest consumer price data to be released on Wednesday evening Beijing time. Not long after, two crucial Fed monetary policy decision-makers said there was no need to rush to raise rates at two consecutive FOMC monetary policy meetings, after which investors sharply cut their bets on a rate hike this month. In a speech mainly focused on communication, Hammack emphasized that Fed monetary policy decision-makers explaining the economic data and thought process behind policy formulation can benefit the public and investors. She said officials explaining the so-called "reaction function" can help consumers, investors, and business leaders make wiser decisions. However, officials should not make "certain predictions" about the future direction of interest rates. Fed Chair Kevin Warsh was appointed by President Donald Trump earlier this year. To avoid providing too much guidance to financial markets about the direction of interest rates, he reduced public communication on the economy and monetary policy. "I want to draw a line here. The reaction function is not forward guidance," Hammack said. "Completely conflating the two could cause well-intentioned logical explanations to be understood as a commitment." Hammack dismantles two illusory scenarios in one stroke: high yields and low oil prices are not guarantees that the Fed will stop raising rates Hammack's latest hawkish remarks challenge two automatic inferences: that rising long-term U.S. Treasury yields can replace the Fed's rate hike process, and that falling oil prices can end inflation. The former ignores the support for demand from strong stock markets, low credit spreads, and robust capital expenditure; the latter ignores the persistent pressure from tariffs, AI construction, and service prices. In her latest speech, she judged that overall financial conditions remain relatively neutral and proposed that the real neutral rate may return to pre-financial-crisis levels. She has also repeatedly emphasized in recent speeches that whether policy is sufficiently tight depends on whether demand and inflation cool. Therefore, a possible pause in October, in her view, does not mean the tightening process has ended; a preference for small, quick adjustments does not equal a commitment to consecutive rate hikes. Long-term yields depend on future short-term rate expectations and term premiums. Even if the probability of a rate hike at one meeting declines, persistent inflation, fiscal and corporate financing supply, and geopolitical uncertainty may still push up long-term funding costs and affect financing conditions in Europe and Japan through cross-border asset allocation. From this reasoning, the major test for AI computing infrastructure-related investment, which is crucial to the trajectory of the global stock market bull market, becomes more concrete: the AI computing infrastructure construction process greatly boosts earnings while competing for electricity, equipment, and capital; especially after long-term financing costs dominated by 10-year U.S. Treasury yields rise sharply, whether project cash returns can cover funding costs will become an important dividing line for valuations. Middle East and Russia-Ukraine geopolitical ceasefires have not yet materialized, inflation and long-term U.S. Treasury warnings still echo Hammack's overall monetary policy stance can be described as clearly hawkish, but she retains flexibility on the timing of action. She voted in favor of a 25-basis-point rate hike at the FOMC monetary policy meeting in July; this time she emphasized the need for restrictive policy, and in an interview with Reuters reporters the same day she also clearly stated that the benchmark rate needs to be higher, while remaining open to the October FOMC meeting. She hopes to ease demand pressure by moderately suppressing corporate investment or wealth-effect-driven consumption, while trying to avoid damage to nonfarm payrolls. The global long-bond market has recently sharply repriced the global long-term energy inflation trajectory: on October 7, the U.S. 10-year and 30-year Treasury yields touched intraday highs of 5.368% and 5.735%, respectively, both the highest since 2002; on October 9, official data fell back to 5.24% and 5.60%. On October 12, the U.S. Treasury cash market was closed for a holiday. In addition, the global geopolitical situation has not yet formed a reliable cooling effect on the outlook for U.S. energy costs and broad inflation warming, nor on the trajectory of long-term U.S. Treasury yields. The Russia-Ukraine energy ceasefire is still under negotiation, with Zelensky saying Russia continues to attack energy facilities; Saudi Arabia and Hormuz shipping are again facing security shocks. On October 12, Brent and WTI closed up 1.84% and 2.06%, respectively, at $106.65 and $93.74 per barrel. On October 9, the NYMEX front-month ultra-low-sulfur diesel crack spread versus WTI, although down $6.45, still reached $96.80 per barrel, in a historically high range, enough to reflect that refining and refined product supply bottlenecks have not yet been resolved.