US Inflation Stays at 3.4% as 25-Year-High Bond Yields and Soft Jobs Data Test the Fed

Why Long-Term US Yields Have Reached 25-Year Highs

The US economy is facing three simultaneous pressures: inflation remains high even after a slight decline, long-term US government yields have hit multi-decade highs, and the labour market is creating far fewer jobs than expected.

Consumer prices rose 3.4 percent, still well above the Federal Reserve's 2 percent target. The article identifies the Iran war and higher oil prices as the main driver. At the same time, yields on 10- and 30-year US Treasuries are above 5 percent, the highest in 25 years. Economists cited in the report link that rise to stubborn inflation and to US government debt of more than 120 percent of GDP, which has reduced demand for long-dated government paper.

The Fed has left its policy rate unchanged, and its next decision is due in mid-September. New Fed chair Kevin Warsh faces a split committee: high inflation argues for raising rates, while weak jobs data argues against. Markets increasingly price in a September increase, though Richmond Fed president Tom Barkin has publicly questioned whether a hike is needed.

The consequences reach beyond the US. If American rates rise faster than eurozone rates, the dollar strengthens and the euro weakens, making dollar-priced commodities more expensive for Europe and potentially adding to eurozone inflation.

What the Yield, Jobs and Debt Mix Means for the Fed and the Eurozone

Three forces are interacting: sticky inflation, fiscal debt supply and a cooling labour market. Their combined effect explains why the Fed's next decision is more fraught than a simple inflation print would suggest.

Why the Federal Reserve Cannot Simply Pull Long-Term Yields Down

The Fed controls short-term interest rates, not long-term bond yields. Chief economist Carsten Mumm of Donner & Reuschel argues that long-term yields will probably not fall if inflation stays high or rises, even if the Fed were to cut rates. That means corporate and household borrowing costs can remain elevated even if the Fed eventually eases.

The Dual Mandate Collision: Sticky Prices Against a Weakening Labour Market

Unlike the European Central Bank, whose primary goal is price stability, the Fed also has an employment mandate. Recent official figures showed far fewer new jobs than expected, weakening the case for a rate increase. Yet inflation at 3.4 percent and high oil prices make doing nothing equally uncomfortable. Economist Tobias Basse of NORD/LB says the latest consumer price data give Chair Warsh reasons to delay the rate increases some Fed watchers are demanding.

How the US Debt Load Feeds Corporate and Household Borrowing Costs

US government debt above 120 percent of GDP and years of large budget deficits have made long-term Treasuries less attractive to buyers. Rising long yields translate into higher financing costs: Carsten Mumm notes that companies pay more for credit, and households face higher mortgage costs. If the Fed raises its policy rate, credit-card, auto and student loan costs would also rise, braking US consumption.

The Transatlantic Channel: A Stronger Dollar and European Imported Inflation

Higher US rates relative to the eurozone make the dollar more attractive. Carsten Mumm warns that a weaker euro would make internationally traded commodities, which are priced in dollars, more expensive for Europe. That is a direct route through which US monetary tightening could push European inflation higher, even though the ECB's mandate and inflation outlook differ from the Fed's.

Positioning Ahead of the Fed's September Decision

For finance, credit and investment decisions, the data points in this report point to several concrete planning steps ahead of the Fed's mid-September meeting.

• European importers and treasury teams: re-run EUR/USD scenarios for a September Fed hike. The report states explicitly that faster US rate increases would strengthen the dollar and raise the cost of dollar-priced commodities, a direct margin risk for energy and raw-material buyers.
• Credit-sensitive US businesses and lenders: link September planning to the Fed's policy decision, not to the latest inflation figure alone. Higher rates would raise credit-card, auto and student loan costs and slow consumption, while the weak jobs data may delay the hike.
• Fixed-income investors in long-dated US Treasuries: treat the rise above 5 percent as driven by inflation and debt supply, not only by the Fed's next move. Carsten Mumm warns that long yields may stay high even if the Fed cuts, so duration exposure remains sensitive to further moves in inflation expectations and fiscal confidence.
• European exporters and importers should be modelled separately: companies earning dollars may benefit from a stronger greenback, while firms buying dollar-priced raw materials face higher input costs. A single euro-dollar assumption will hide both effects.