The 10-year Treasury yield is sitting on the doorstep of 5%, and that's a warning sign for stocks

The likelihood appears to be on the rise that Federal Reserve Chairman Kevin Warsh will increase interest rates several times this year.

More bad news on inflation achieved something Treasury Secretary Scott Bessent has struggled to deliver: calm in long-dated U.S. bond yields.

Weeks of tumult in the bond market have pushed 10-year BX:TMUBMUSD10Y and 30-year BX:TMUBMUSD30Y Treasury yields up by about 50 basis points and 45 basis points, respectively, since late June. That's lifted long-term rates back to some of their highest levels since 2007 and raised the cost for households, corporations and the U.S. government to borrow.

Yet on Friday, the benchmark 10-year Treasury yield's rapid move toward the crucial 5% threshold suddenly slowed to a crawl. Why?

Wall Street now feels fairly confident the Federal Reserve under its new chairman, Kevin Warsh, will start hiking interest rates next week, for the first time since 2023.

A hike could provide a strong signal to the market that confronting the nation's inflation problem can no longer wait.

"At this point, the Fed's only choice is to go," said Loren Moran, fixed-income portfolio manager at Wellington Management, following the consumer-price index's climb to a 3.4% yearly rate. That's well above the central bank's 2% target.

"One of the biggest risks would have been a softer CPI that left the market in that 'unhinged moment' in rates," she said.

Fed officials had been hoping that inflation pressures would subside over time, potentially even paving the way for more rate cuts. Yet the reality of the Iran war has run up against the Trump administration's desire for lower rates. The artificial-intelligence race also has proceeded at a stunning pace, driving the economy and adding to inflation.

Bessent this week kicked off a series of bigger buybacks of long-dated Treasurys with the aim to keep the world's biggest debt market functioning smoothly and stabilizing long-end rates. Yet it's growing confidence around Fed rate hikes that helped steady them Friday.

After jumping 25 basis points in two weeks, the 10-year Treasury yield bumped up only 3 basis points to 4.97%, according to Dow Jones Market Data.

"If we get a result that is not a hike, I think that just introduces volatility back in," said Charlie Ripley, senior portfolio manager at Allianz Investment Management. Yet if the Fed ends up raising rates by 50 or 75 basis points this year, "that's not going to bring down the price of oil or gasoline," he said.

The national average price of gasoline at the pump was $4.295 on Friday, according to AAA, advancing as the Iran conflict pushed up crude prices.

It comes down to trying to restore credibility in getting to the 2% Fed inflation target, said Moran of Wellington Management, "and are we wiling to take some of the medicine of cooling the economy?"

A modest reprieve Friday from surging oil prices provided relief to the equity market, which has largely focused on eye-popping earnings, instead of the rising cost of capital; crude-oil (CL00) (BRN00) prices above $100 a barrel; the tariff fight; and the U.S. deficit, which is now near $2 trillion.

"It's a bit shocking" to see the S&P 500 index SPX sit less than 2% off its record highs, despite the surge in oil prices and long-dated Treasury yields over the summer, said Adam Turnquist, chief technical strategist at LPL Financial.

"I'd never have guessed that," Turnquist said, adding that a 5% to 10% decline would have been his call, given the backdrop. But the economy is holding up fine - or at least well enough, he said. "The earnings story has held up," he added.

Meanwhile, traders on Friday pushed up their view of the likelihood of the Fed hiking short-term rates by 25 basis points next week to nearly 90%, up from a coin toss a month ago, as shown by the CME FedWatch Tool.

Looking beyond September, the derivatives market pointed to almost 90 basis points of Fed rate hikes this year.

"We have multiple hikes priced in," said Scott Pike, a senior portfolio manager at Income Research + Management. "If you go back historically, you wouldn't expect the Fed to just hike once."

-Joy Wiltermuth