The Federal Reserve is likely to keep interest rates on hold at its next meeting in three weeks, two Fed officials said on Monday, as a spike in long-term rates makes borrowing more expensive and could help prevent the central bank from taking further action. action to cool inflation.
Since the end of July, the 10-year U.S. Treasury yield has jumped from around 4% to around 4.8%, a 16-year high.rising yields Overstated other borrowing costs and improved the national average 30-Year Mortgage Rates That rose to 7.5%, a 23-year high, according to Freddie Mac. As corporate bond yields accelerate, corporate borrowing costs rise as well.
Philip Jefferson, vice chairman of the Federal Reserve Board and a close ally of Chairman Jerome Powell, said in a speech to the National Association of Business Economics on Monday that he will “continue to be aware” of rising bond rates and “keep that in mind as I set policy.” . Evaluate future policy paths. “
US stock prices reversed losses after Jefferson’s comments. The S&P 500 was last up 0.5%.
Jefferson’s remarks followed a speech earlier in the day by Dallas Fed President Lorie Logan, a voting member of the Fed’s rate-setting committee, at NABE. She also said higher long-term bond rates could help the central bank lower inflation to its 2% target.
Since last March, the Federal Reserve Raised short-term benchmark interest rates 11 times, from near zero to about 5.4%. The purpose of this rate hike is to defeat the worst inflation in more than 40 years. But they have also led to sharp increases in borrowing rates and raised fears of a possible recession.
“If long-term rates remain elevated,” Logan said of the Fed’s benchmark interest rate, “the need to raise the federal funds rate may diminish” as investors become increasingly concerned about the risks of holding long-term bonds. When investors find buying or holding bonds riskier, bond interest rates rise.
On Thursday, San Francisco Fed President Mary Daly said that if long-term interest rates remain high, “our need for further action will diminish.”
The comments from Fed officials coincide with growing expectations in financial markets that the Fed will skip raising interest rates at its Nov. 1 meeting and then its subsequent Dec. 13 meeting, leaving its benchmark rate unchanged. at the current high level. End of this year. The futures market priced in only a 12% chance of a rate hike in November and a 26% chance of a December rate hike, both significantly lower than Friday (at the time) Jobs report unexpectedly strong.
Fed officials did not contradict these expectations in their remarks, suggesting they may not be opposed to them at this time.
Gregory Daco, chief economist at Ernst & Young, said, “Federal Reserve officials are increasingly reassured that the July rate hike will be the last in this tightening cycle, and the focus now is on moving monetary policy to the next level.” How long to stay at the current level of restrictions.” Accounting and consulting firm.
The question economists and Fed officials are trying to determine is what factors are pushing up long-term interest rates. Raising interest rates by the Fed does not automatically translate into higher long-term borrowing costs, such as the 10-year Treasury yield. Market forces, expectations for future inflation and future economic growth also affect yields.
Logan pointed out that if long-term interest rates rise mainly because investors expect faster economic growth in the future, then the Fed may have to continue to raise short-term interest rates to cool the economy. But analysts increasingly believe the 10-year rate is rising as investors see greater inflation and economic volatility and view holding longer-term bonds as riskier. In this case, the Fed does not necessarily need to take more steps to cool the economy.
Another question troubling Fed officials is how long it might take from raising short-term interest rates to have an impact on the economy. Economist Milton Friedman said in the 1960s that Fed policy had a “long and variable lag,” but Fed officials now disagree about how long that lag should be.
Logan, like Fed Governor Christopher Waller, said she believes most of the impact of the Fed’s rate hikes has already occurred because Powell and other Fed officials clearly warned that rates could rise quickly and businesses responded quickly.
But Jefferson noted that large amounts of corporate debt was refinanced at extremely low interest rates during the pandemic and said companies will have to refinance at higher rates in the coming years, which could slow economic growth.
When considering future interest rate decisions, Jefferson said he has to keep in mind all the rate hikes the Fed has enacted that have yet to have an impact on the economy, “which may impact what I think is going to happen next.”
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