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(Bloomberg) — A bond market spooked by fears of accelerating inflation will be an early test for incoming Federal Reserve Chair Kevin Warsh, according to the head of research for Societe Generale Americas.
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Warsh, President Donald Trump’s chosen successor to Jerome Powell, is facing mounting evidence that an energy price spike sparked by the Iran war is fueling US inflationary pressures, SocGen’s Subadra Rajappa said Friday on Bloomberg Television’s Surveillance. It will complicate his ability to deliver the lower rates he has championed — and that Trump has demanded.
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“I’m starting to get a bit concerned because bond yields definitely feel like they are getting a bit unhinged,” Rajappa said. “I think we should really be paying attention to the signals that we are getting out of the bond market.”
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Treasury losses deepened heading into the weekend, exacerbated by Brent crude’s intraday surge past $109 a barrel, after inflation at the retail and wholesale levels exceeded most analysts’ expectations. The yield on two-year Treasuries climbed Friday past 4.08%, a level not seen since March 2025, while the 30-year yield reached the highest in almost a year.
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A report on Wednesday showed producer costs accelerating at the fastest pace since 2022, prompting traders to boost bets the Fed’s next move will be a hike. Rate markets now see an almost two-thirds chance the Fed will increase borrowing costs by December, data compiled by Bloomberg showed.
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As recently as Feb. 27, the day before the US and Israel attacked Iran, traders were predicting more than two rate cuts this year.
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That turnabout underscores the challenge for Warsh, who was confirmed to the Fed chair’s post on Wednesday and will preside over a Federal Open Market Committee meeting for the first time on June 16-17. Powell’s last day as chair is Friday, though he plans to stay on as a governor in a term that runs until 2028.
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“What is really, really going to be important for Kevin Warsh is keeping inflation expectations in check,” Rajappa said. “When inflation expectations start to get a bit unhinged, then he has a problem on his hands. It’s very, very important for the Fed to change its bias from easing to neutral and be ready to act if needed.”
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(This story was produced with the assistance of Bloomberg Automation.)
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