Federal Reserve officials are grappling with a run-up in bond yields since they last met in September that could obviate the need for further interest-rate hikes — and also threatens to derail a soft landing.
(Bloomberg) — Federal Reserve officials are grappling with a run-up in bond yields since they last met in September that could obviate the need for further interest-rate hikes — and also threatens to derail a soft landing.
After signaling one more rate hike was likely this year, policymakers in recent days have said the path is less clear, as they parse the reasons behind a surge in US 10-year Treasury yields that has led to tighter financial conditions. In the meantime, several officials have suggested the US central bank can hold off on raising rates at their next gathering on Oct. 31-Nov. 1, remarks that bond markets cheered.
Here’s what Fed officials have said about rising yields:
Fed Vice Chair Philip Jefferson
2023 voter: Yes, permanent
Leans: Centrist
Philip Jefferson, who as vice chair plays a key role in communicating Fed policy on behalf of Chair Jerome Powell, said Monday he’s watching the increase in Treasury yields as a potential further restraint on the economy even though the rate of inflation remains too high. Jefferson said the central bank needs to balance the risk of not tightening enough with the risk that policy would become too restrictive.
“Looking ahead, I will remain cognizant of the tightening in financial conditions through higher bond yields and will keep that in mind as I assess the future path of policy.”
Dallas Fed President Lorie Logan
2023 voter: Yes, rotating
Leans: Hawkish
Lorie Logan, a former New York Fed official, said Monday the recent surge in long-term Treasury yields may mean less need for the US central bank to raise its benchmark interest rate again. If higher yields reflect investors’ waning appetite to take risks rather than reflecting stronger economic growth, that means that financial conditions are tighter than they would be otherwise, she said.
“Financial conditions have tightened notably in recent months,” she said. “But the reasons for the tightening matter. If long-term interest rates remain elevated because of higher term premiums, there may be less need to raise the fed funds rate.”
San Francisco Fed President Mary Daly
2023 voter: No
Leans: Dovish
Mary Daly said Tuesday that higher yields could take the place of monetary policy tightening, which the majority of policymakers signaled as a preferred path of rates at their September meeting. Daly has said that the central bank can keep interest rates steady if the labor market continues to cool and inflation heads toward the Fed’s 2% target.
“Recently, bond yields have tightened, meaning financial conditions have tightened,” she said. “If that’s tight, maybe the Fed doesn’t need to do as much. That’s why I said, depending on whether it unravels, or whether the momentum in the economy changes, that could be equivalent to another rate hike.”
Minneapolis Fed President Neel Kashkari
2023 voter: Yes, rotating
Leans: Hawkish
Neel Kashkari said Tuesday he wasn’t yet convinced that a surge in long-term Treasury yields would lessen the need for further rate hikes, saying it depends on what is driving the recent rise in borrowing costs. He called the recent run-up in yields perplexing, and said it may be driven by growing optimism about the economy over the next five to 10 years or higher US government borrowing.
“It’s certainly possible that higher long-term yields may do some of the work for us in terms of bringing inflation back down,” Kashkari said. “But if those higher long-term yields are higher because their expectation about what we’re going to do has changed, then we might actually need to follow through on their expectations in order to maintain those yields.”
Fed Governor Christopher Waller
2023 voter: Yes, permanent
Leans: Hawkish
Christopher Waller, who has been among the most hawkish policymakers, said Wednesday the central bank can watch and see what happens before taking further action with interest rates as financial markets tighten. Waller noted the recent rise in yields, and said tighter financial conditions stemming from the bank crisis in March amounted to “a rate hike in and of itself,” though the broader credit crunch that some expected never materialized.
“Now, once again, financial markets are tightening up and they are going to do some of the work for us.”
Cleveland Fed President Loretta Mester
2023 voter: No
Leans: Hawkish
Loretta Mester said Oct. 3 that higher Treasury yields would lead to tighter financial conditions if sustained and are going to factor in to whether she sees a need to raise the federal funds rate further. She said rates might be rising because of stronger growth, along with concerns about the federal budget or fiscal spending.
“We raised the funds rate intending sort of to change financial conditions and tighten financial conditions,” she said. “We’ve seen that 10-year rate go up quite a bit since, even since the last meeting. So that’s certainly going to feed into whether we think we need to, or whether I think we need to, raise the funds rate again. If it’s sustained, then that’s a tighter financial condition that will help moderate growth and moderate demand, bringing it into better balance with supply. So that’s certainly a factor I look at.”
Atlanta Fed President Raphael Bostic
2023 voter: No
Leans: Dovish
Raphael Bostic has been among the most dovish policymakers this year, making the case that the Fed has done enough to bring inflation back to the central bank’s 2% target. Asked about yields Tuesday in an event with bankers, he said rates are “clearly” restrictive, the economy is slowing down and more impacts from the Fed’s increases have yet to come.
“I don’t think we need to do anything more in terms of interest rates,” Bostic said. “Interest rates are restrictive. Inflation is coming down. And if you want to have a measure of the degree of our restrictiveness, you compare what our interest rate is to what the rate of inflation is. And if our interest rate is higher than that, then we’re definitely, in real terms, putting a bind on the economy.”
Boston Fed President Susan Collins
2023 voter: No
Leans: Centrist
Susan Collins said Thursday that if the rise in long-term yields is “sustained,” it could lower the necessity for more rate increases in the near term. The Fed official said Treasury yields, mortgage rates and corporate bond yields are all “somewhat higher” than they were in mid-September. Collins has said she is among the officials who in September saw the need for another rate increase this year, and made it clear this week that further tightening is not off the table.
“Importantly, the rise in long-term yields implies some tightening of financial conditions,” Collins said. “If it persists, it likely reduces the need for further monetary policy tightening in the near term. This reinforces my view that we are very near, and perhaps at, the peak” federal funds rate for this tightening cycle, she said.
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