US borrowing costs hit the highest level since 2007 after the Federal Reserve held rates steady at 3.5 to 3.75 per cent, underscoring fears the central bank cannot contain inflation from Donald Trump's war in Iran. The 30-year Treasury yield rose to 5.23 per cent, the biggest jump since Trump's "liberation day" tariff announcement in April 2025.

Fed chair Kevin Warsh vowed not to "waver" on inflation, but markets were unnerved by the hold and his focus on market moves between meetings. Three FOMC members — Lorie Logan, Beth Hammack, and Neel Kashkari — dissented, arguing for immediate hikes. The two-year yield fell to 4.28 per cent while stocks dropped: S&P 500 down 1.5%, Nasdaq 100 down 2.1%.

European bonds echoed the sell-off, with 30-year Bunds at 3.68% and gilts at 5.76%. With inflation at 4.1 per cent in May — well above the 2% target — and oil prices surging amid Strait of Hormuz disruptions, economists warn the Fed may lose credibility. Professor Simon Bowmaker said Warsh faces a "big challenge" as policy divisions deepen.