A global bond market selloff is putting the Federal Reserve's interest-rate decision under intense scrutiny, with investors divided over whether another rate hike or a pause would pose the bigger risk to the economy and financial markets, Reuters reported. S.

consumer inflation in August. Markets are pricing in about a 76% probability of a quarter-point increase, while expectations point to a cumulative 50 basis points of hikes by the end of 2026, according to Reuters.

Read more: Global Market | SB Energy to sell up to $500 million worth of shares to Japanese investors ahead of US IPOA rate increase would be the Fed's first since July 2023 and could push up borrowing costs for households and companies while slowing interest-rate-sensitive areas of the economy. However, some investors warn that keeping rates unchanged could trigger an even sharper selloff in long-dated government bonds if the Fed appears less committed to bringing inflation back to its 2% target.

S. government debt.

A combination of persistent inflation uncertainty, heavy Treasury issuance and large fiscal deficits has increased concerns that investors may demand higher yields to hold long-term bonds. According to Reuters, some investors believe a Fed pause could reinforce those concerns by raising doubts over the central bank's willingness to maintain a sufficiently restrictive policy stance.

Long-term Treasury yields are already around levels not seen in roughly two decades, increasing the potential impact on mortgages, corporate borrowing and other financial assets. Fiscal Deficits Add to Inflation ConcernsThe bond market's problems extend beyond monetary policy.

S. government's fiscal position.

Inflation has remained above the Fed's target for years, while oil prices have climbed toward or above $100 a barrel. 5% of gross domestic product, while economic growth remains relatively strong.

Reuters reported that some fixed-income investors believe this combination could make it more difficult for inflation to return sustainably to the central bank's 2% objective. A stronger policy response from the Fed could therefore help reinforce its inflation-fighting credibility and potentially prevent term premiums from rising further.

Investors Split Over Another HikeNot all investors believe another rate increase would resolve the bond market's problems. Some argue that tighter monetary policy could put additional pressure on sectors already sensitive to high borrowing costs, particularly housing, while having a limited effect on parts of the economy that continue to drive growth.