Fed and BoJ expect rate hikes as US bond market flails

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Several will meet over the next few days, including the Federal Reserve and the Bank of Japan to decide whether to raise interest rates. The stakes of these decisions are very high, particularly for U.S. Treasury Secretary Scott Bessent. He's been trying to ease a sell-off in American government bonds. So much so that earlier this summer, he helped prop up the Japanese yen, in part hoping that would calm the U.S. bond market. So far, it hasn't been very successful, but these upcoming central bank decisions could change things. The FT's Kate Dougid joins me now to discuss. Hi, Kate. Hi. Okay, just run me through it, Kate. The U.S. Treasury market has been a bit crazy what's been going on. So I think that the story over the past month for investors has been a rise in bond yields, right? What that means is that borrowing costs for ordinary Americans, as well as for the U.S. government, have gone up. Scott Bessent is trying to stabilize the U.S. Treasury market, and he's done that in two different ways. He did it the first time by supporting this young intervention, and then he also implemented this Upsized Buyback program, where the Treasury has bought older bonds back from people in the market. Neither one of these have had any sort of long-term effect, and that's where we are going into the Fed meeting this coming week. Right. And as yields are going up, prices on U.S. bonds are going down. Now in addition to the Fed meeting, we've also got this B.O.J. meeting too. What should we expect from these rate decisions? So in both instances, we are expecting an interest rate hike of about a quarter percentage point. Nobody is a hundred percent sure that either of these are going to happen. In Japan, it seems pretty likely in the U.S. traders in the futures market are betting on a rate hike. They're putting sort of 80 to 90 percent odds online, but President Donald Trump has continued to pressure the Fed to lower interest rates, and he's put that pressure on Kevin Warsh as well. And so if Warsh raises interest rates, which is expected because of the data, because of inflation continuing to run above target, he will be in defiance of President Trump. Okay. So we have this tension between Fed Chair Kevin Warsh and Donald Trump. What happens if neither the Fed or the B.O.J. raises rates? I think that we might see a pretty big freak out in the market. I think we would see government bonds mature anywhere between 10 and 30 years. I think that we would see a major sell off there. Those are bonds that sell off when investors believe that the government is not appropriately controlling inflation. And then the more things start to sell off in the bond market, the more likely it is that these things spill over into other markets. The more likely it is that equities will start being affected, that currencies will start being affected, that the credit market will be affected. And so it's a bit of a tinder box. So given that, what are you going to be watching out for this week? These are going to be the most important rate decisions this year. In both instances, this would be the first hike of the cycle. If the Bank of Japan and the Federal Reserve show themselves to be willing to fight inflation and eager to fight inflation, I think that we could see the bond markets start to calm down a little bit. In Japan, I think it will also be important because they're expected to raise interest rates, but they will also signal how quickly they plan to continue raising interest rates. Earlier this year, we were expecting the Bank of Japan to raise interest rates maybe once every six months. It's now looking more likely that they'll be doing it about once every quarter. In the same way, the Fed is going to be signaling what's coming next. Kate, do good is the FT's markets editor. Thanks, Kate. Thank you so much. Yesterday, a Russian drone hit a train line in Ukraine shortly after a group of foreign dignitaries traveled on that same line. Those included former UK Prime Minister Boris Johnson, former Swedish Prime Minister Kerbilt, and former CIA head David Petraeus. They were returning from a summit in Ukraine and disembarked shortly before the attack, which took place on the Polish border. That train line is used by world leaders regularly to reach Kiev, and this comes after a Russian made drone nearly hit Ukrainian President Vladimir Zelensky's plane last week. Prince William County in Virginia would have been home to one of the world's largest data center campuses, but in July, the project was cancelled after years of opposition in part by a crew of American civil war preservationists. The FT's Zera Munir has been reporting on battles over data centers that are popping up all around rural parts of the US. Hi, Zera. Hi, Josh. Okay, Zera, just start by telling me a little bit about this area, Prince William County. So the AI boom has meant there's been this massive build out of data centers across the country, and Virginia is where the greatest proportion of that has happened. The other interesting thing about Prince William County, and that's pertinent to the fight that just took place there, is it has a big civil war history. It looks pretty much like it did that morning of August 1862. I met up with David Duncan, who is the president of the American Battlefield Trust at the Manassas Battlefield, and we walked and talked on these sprawling green fields where the first full-scale battle of the civil war took place. Fortunately, no one shooting at us today, but you can still get a sense of what they saw and what they might have experienced, those young soldiers on both sides. And he is basically adamant that in order to properly tell civil war history, you have to preserve these sites. These places are important to come and bring youngsters to, I think, to tell them the story of where we came from as a nation, and that will hopefully make them better citizens. That's why his organization, the American Battlefield Trust, launched a lawsuit. That was part of this kind of sprawling opposition to the data center project, which also included lobbying the local government, protests at public meetings, and it was comprised of this kind of motley crew of people who had come together. So the area clearly has this really rich history that matters a lot to people. Tell me about the data center project. I mean, the developers who wanted to erect a data center in Prince William County are backed by two private capital giants. So Blackstone and Brookfield, you know, data centers are one of maybe the largest bets that these firms are making right now. And this was arguably going to be one of their largest projects ever. It's pretty significant that a project of this size was struck down. And that's kind of why we went to find out exactly what took place, why the plans had to fold. What about the people who were in favor of this data center project? I mean, the people who arguably most wanted the data centers to be built were local landowners, and they knew they could get a good amount of money for their land. And then there are also kind of local politicians, technocrats. So one of the arguments presented to us is about taxes. You can tax them. And that means that you can funnel more money into your local schools, your firefighters and policemen might be able to get pay raises. They're kind of all of these local facilities or services that might be able to get a bit of a boost funding wise. This fight took place over several years. And it culminated in this big town hall meeting in July. Tell me about what happened there. So this is back in 2023, two weeks before Christmas. There is a 27 hour public caring that takes place around the plan to build this data center campus. And there was an extremely wide range of comments and presentations made before the panel. What is happening here is you haven't done your homework. our children were nestled. but for us, visions of destruction and pollution danced in our heads. You don't want to be the richest county in America, because that's the position three of you were taking. In the end, though, the project was voted through. But then, actually, in a twist over two years later, it was overturned as a result of a court battle. And so that is why the project is no longer being built. How does Prince William County fit into the war? How does Prince William County fit into the wider landscape of AI data centers that are being proposed across the country? I think people have two main frustrations. And one is around the impact that these things have on their electricity prices and their natural environment. And the other is about how data centers represent the advent of a technology that they don't feel totally certain about yet. A couple of the people we talk to who are anti-data center activists felt that they became more broadly anti-AI over the course of the fight, but that is not necessarily the position that they started from. Zeremonier covers real estate in the US for the FT. Thanks, Sarah. Thanks, Josh. You can read more on all of these stories for free. When you click the links in our show notes, this has been your daily FT News Briefing. Check back tomorrow for the latest business news. [MUSIC PLAYING]