Evening Brief – 11.09.23
Federal Reserve Chair Jerome Powell spoke Thursday to a monetary policy panel presented by the International Monetary Fund, making a series of hawkish comments.
Powell stated that policy decisions will be made meeting by meeting, but that the Fed will be “attentive” to price because there is still a “long way to go” to return inflation to the central bank’s 2% target.
The risk of another interest rate hike is not gone for good, despite a growing consensus that believes the central bank has ended its tightening cycle.
“If it becomes appropriate to tighten policy further, we will not hesitate to do so,” Powell said, adding the Fed “is committed to achieving a stance of monetary policy that is sufficiently restrictive to bring inflation down to 2% over time; we are not confident that we have achieved such a stance.”
The recent drop in US Treasury yields, which has pushed the 10-year yield below 4.50% for the first time since September, may have driven Powell to adopt a more hawkish tone, as opposed to a slightly dovish tone at the press conference following the FOMC’s decision to keep rates unchanged last week.
Powell did everything he could to keep policy options open. However, the market is not buying it. Most Fed watchers believe the tightening cycle is over, with a 90% chance that the Fed will remain on hold in December.
Inflation has indeed declined from elevated levels, but the Fed’s 2% target remains elusive. Furthermore, if the economy continues to thrive and inflation remains above projections, the Fed will not hesitate to raise interest rates further.
Data dependency is what they’re trying to get across, but it’s probably going to take more than one data point for the Fed to feel emboldened to continue with rate hikes. But it’s also going to take more than one data point to convince them otherwise. Today, at the very least, the mantra “higher for longer” has been reaffirmed.
When looking at the reasons why the Fed hasn’t increased, even if inflation has been trending sideways to slightly upward recently, rising US Treasury yields have given the Fed pause.
Following a poor 30-year bond auction in the United States, the central bank got more in the form of rising yields today. The bond was priced at a high yield of 4.769%, which was lower than the previous month’s yield of 4.837% and just short of the April 2010 peak. More crucially, it tailed the When Issued by 5.3 basis points, which was horrendous.
Furthermore, the 50-basis-point drop in the 10-year yield to 4.50% may not be enough to avoid further monetary policy tightening. The risk is not that the Fed raises interest rates too much, but that it does not do enough to preserve price stability. The Fed should be erring on the side of caution, arguably raising rates above what they need to ensure inflation gets back to 2%.
Powell needs to make the markets believe he is willing to tighten again.