The possibility of another interest-rate hike by the Federal Reserve seems to be diminishing, thanks to a significant increase in bond yields. In a speech delivered to the Economic Club of New York, Fed Chairman Jerome Powell indicated that the central bank is likely to maintain steady interest rates at its upcoming meeting in late October and early November. Powell emphasized that the economy is already moving towards price stability, but also highlighted the need for cautious monetary policy adjustments due to delays and rising geopolitical uncertainties.
EY Chief Economist Gregory Daco confirmed this sentiment, stating that the Fed is in no rush to further tighten monetary policy. As a result, a November rate hike is no longer expected. The market agrees with this assessment, as the CME FedWatch Tool shows a 99% likelihood of the Fed keeping the target rate between 5.25% and 5.5% following Powell's remarks.
During a follow-up question-and-answer session with David Westin, anchor of Bloomberg Wall Street Week, Powell acknowledged the impact of rising bond yields on financial conditions. After his speech, the 10-Year Treasury yield reached its highest level since July 2007, standing at 4.987%. The increasing yields across the Treasury curve have consequences on interest rates for various loans and investments, including corporate bonds and mortgage-backed securities.
When asked about the reasons behind the surge in bond yields, Powell mentioned several possibilities. If the increase is due to "endogenous" factors or the market's expectation of future rate hikes, then financial conditions would relax if the Fed refrained from proceeding. However, Powell also pointed out other factors that could be driving the rise in yields, such as concerns about fiscal deficits or shifts in the correlation between stocks and bonds. He suggested that these factors may be playing a more prominent role than expectations of further actions by the Fed.
Given these circumstances, it appears that the recent increase in bond yields may have a lasting impact on financial markets. The path ahead for the Federal Reserve's monetary policy is expected to be cautious and closely monitored, with no immediate plans for tightening.
Fed Chair Signals Caution Amid Bond Market Tightening
In recent remarks, Federal Reserve Chair Jerome Powell expressed the need for patience and observation as the bond market tightens financial conditions. Powell acknowledged the view of some Fed colleagues who believe that the bond market is effectively tightening conditions for the central bank. San Francisco Fed President Mary Daly previously stated that the bond-market tightening was already on par with a rate hike, and bond yields have continued to rise since then.
Powell emphasized that the purpose of tightening policy is to impact financial conditions, and the increase in bond rates is currently achieving this goal. He also noted that the effect of rising bond yields on the Fed's decision to raise rates further remains uncertain.
Addressing concerns about the arithmetic behind rising bond yields, Powell indicated that it could potentially reduce the Fed's motivation to continue raising rates. However, he stated that it remains to be seen.
Furthermore, Powell made it clear that he does not endorse any specific level of longer-term rates, implying that investors will play a significant role in determining these rates.
While Powell did not provide a specific direction for monetary policy, his remarks strongly suggest that the default policy action for the Fed is likely to involve further firming rather than loosening. This viewpoint aligns with Peter Williams, a global macro strategist and economist at 22V Research, who interpreted Powell's comments as a sign that there is little desire within the Fed to discuss rate cuts at this time.
