Policymakers at the Federal Reserve are feeling optimistic that a rise in long-term Treasury yields could finally put an end to the past 19 months of historic interest rate hikes meant to tamp down inflation.
Wall Street is also feeling hopeful that there won't be further tightening of monetary policy. The odds of another interest rate hike by the Fed in November are falling, according to the CME FedWatch Tool.
Financial markets currently see a nearly 90% chance the US central bank will keep rates unchanged at its next policy meeting to be held on October 31 through November 1. Just a month ago, markets had those odds at just 57%.
The majority of traders are betting that there will be no more hikes and that the Fed will hold rates steady through June 2024 before loosening policy, the CME tool shows.
What's happening: US Treasury rates are white hot —10-year Treasury yields are near their highest levels since 2007. That's bad news for the economy, but those yields could be doing the Fed's job for it.
For American consumers, an elevated 10-year Treasury return means more costly car loans, credit card rates and even student debt.
It also means more expensive mortgage rates. Mortgage rates tend to track the yield on 10-year US Treasuries. When Treasury yields go up, so do mortgage rates; when they go down, mortgage rates tend to follow.
US mortgage rates are at 23 year-highs, and home affordability is at its lowest level since 1984.
That means consumers are beginning to sweat. Americans haven't been this worried about missing a minimum debt payment since the early weeks of the pandemic, according to new consumer survey data released Tuesday by the New York Federal Reserve.
The average perceived probability of not making a minimum debt payment in the next three months increased 1.4 percentage points to 12.5% in September, according to the Federal Reserve Bank of New York's latest Survey of Consumer Expectations. That's the highest rate since May 2020.
But what's bad for the economy tends to be good for bringing prices down. And Fed officials indicated this week that rates are now high enough to lower inflation to their target goal of 2%.
Philip Jefferson, the number two official at the Fed, said in a speech on Monday that he would "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."
That's Fed speak for: I'm paying attention to the fact that borrowing money is more expensive and I'll keep that in mind when deciding what actions the Fed should take in the future.
Dallas Fed President Lorie Logan also suggested on Monday that higher yields mean there's not as much need for future rate hikes.
On Tuesday, Federal Reserve Bank of Atlanta President Raphael Bostic said barring unforeseen economic events, he didn't see the need to raise interest rates any higher.
"I think that our policy rate is at a sufficiently restrictive position to get inflation down to 2%," he said at the annual convention for the American Bankers Association. "I actually don't think we need to increase rates anymore."
Bostic, who does not vote on policy decisions, said that Treasury yields showed rates were "clearly" restrictive and slowing the economy.
Last week, San Francisco Fed President Mary Daly said that the increases in Treasury yields since the Fed's last meeting in September were equivalent to another quarter percentage point interest rate hike. If financial conditions remain tight, she said, "the need for us to take further action is diminished."
What about markets: In a twist, the prospect of steady Fed policy buoyed markets and sent Treasury yields lower on Tuesday. Bonds compete with stocks for investors' dollars, so when equities go up, yields often go down.
The 2-year Treasury yield fell to 4.96% on Tuesday and the 10-year Treasury yield dropped to 4.65%, but both still sit near recent highs.
What's next: Investors will pay attention to the Producer Price Index (PPI), which tracks the average change in prices that businesses pay to suppliers, due out Wednesday and the Consumer Price Index (CPI), a closely watched inflation gauge, on Thursday for further clues about the Fed's next move.
PPI for September is expected to be unchanged for the year at 1.6% and lower for the month at 0.3% versus 0.7% in August, according to Refinitiv estimates.
Inflation as measured by CPI, meanwhile, is expected to have slowed month-over-month to 0.3% from 0.7% in August.
Comments
Post a Comment