Fed Needs to Tame Rampant Bond Volatility

The Federal Reserve won’t want a repeat of 2023 where 10-year Treasury yields soared from a low of 3.3% in April to peak at 5% in October — only to plummet back to 3.8% by year-end. That’s too much volatility for the world's interest-rate benchmark — particularly when there's a record amount of government debt to sell.

A steady-as-we-go two-pronged plan is carefully being engineered by Fed officials, of reversing economic tightening via conventional monetary policy in conjunction with measures to shrink the swollen balance sheet. It helps that dissent within the Federal Open Market Committee has been notably absent under the leadership of Chair Jerome Powell. With inflation down to 3.1%, a third of its mid-2022 peak, the central bank hopes to achieve a soft landing for the economy. This should allow it to steadily bring its official Fed funds rates down this year from its current upper bound of 5.5% — but reducing the bond market turbulence that accompanied the increase in borrowing costs is in everyone's interests. Average volatility has doubled in the past two years compared with the three prior years, and remains elevated.