Two Fed officials have tentatively embraced raising bond yields

NEW YORK, Aug. 24 (Reuters) – Two Federal Reserve officials on Thursday tentatively welcomed the jump in bond market yields as something that could complement the US central bank’s work to slow the economy and return inflation to its 2% target, while noting Also, they see a good chance that no further interest rate increases will be needed.

The policymakers — Philadelphia Fed President Patrick Harker and Boston Fed President Susan Collins — spoke in separate interviews as central bankers and other economic leaders gathered for an annual symposium in Jackson Hole, Wyoming. While presenting their forecasts for monetary policy and the economy, Harker and Collins also assessed what the jump in bond yields meant for the central bank’s mission to slow economic activity to bring down inflation.

In an interview with CNBC, Harker said higher long-term borrowing costs “help cool the economy a little bit.” He said the jump wasn’t a major concern but something he had been watching.

Meanwhile, Collins said on Yahoo Finance’s video channel that higher yields “fit perfectly” with the broader story around the economy and monetary policy. “I think it’s helpful to have higher longer-term interest rates consistent with the understanding that this is going to take some time” on the Fed’s part to bring inflation back to the 2% target.

Harker and Collins spoke before the official start of the Fed’s Jackson Hole conference in Kansas City, which will include a highly anticipated speech on Fed Chair Jerome Powell’s economic outlook at 10:05 ET (1405 GMT) on Friday.

The Fed, which has pushed short-term interest rates aggressively higher since March 2022 to stem the worst spike in inflation in decades, raised its benchmark overnight rate to a range of 5.25%-5.50% at its policy meeting last month. Fed officials still believe that inflation is too high, while noting that its moderation has opened the door to the end of the rate hike cycle. Financial markets are currently skeptical that the US central bank will raise interest rates again at its September 19-20 meeting.

The question about the need for further interest rate increases has been largely driven by the resilience of financial markets and the broader economy in the face of more restrictive monetary policy. In the face of interest rate hikes, which raised the Federal Reserve interest rate by more than five percentage points, the unemployment rate remained historically low and economic growth was strong, even as sectors such as housing were hit hard by higher borrowing costs.

The state of the economy suggests that the Fed may have to do more on monetary policy, while the jump in long-term borrowing costs, which is constraining activity, takes some pressure off the central bank.

Since it settled at around 3.84% at the start of 2023, the yield on the 10-year Treasury note has risen, a key benchmark, and although the moves have been volatile, it has risen significantly since mid-July and was around 4.23% in early afternoon trade. Thursday.

“If interest rates remain at current levels, this would provide significant additional constraint compared to conditions at the time of the last Fed meeting in July, and this additional constraint will be ongoing, peaking at the end of 2024,” analysts at Evercore said. ISI in a research note on Wednesday. This tightening, they said, “seems sufficient – and more than enough – to offset the recent upward surprise in growth without the need for a Fed rate response.”

Are you fixed?

In their interviews Thursday, Harker and Collins dispute the need for further increases.

“Right now, I think we’ve probably done enough,” Harker said, and it might be a good idea to stay flat for the rest of this year and see how that affects the economy. “We are in a restrictive situation, do we have to continue to be more and more restrictive?” he added.

For Hacker, it is very much about the economy operating through the lingering effect of the previous Fed tightening. “What I hear loud and clear during my summer travels is, ‘Please, you’ve come up too fast. We need to get that right,'” he said of his local contacts. Harker also noted the tightening of bank credit conditions, which created additional constraints on the overall economy.

Collins kept the door open for further action but did not call for it.

“We may be close, we may be in a place where we hold” and not raise rates further, Collins said. “But further increases are certainly possible, and we need to look holistically and be really patient now and not try to get ahead of what the data is going to tell us as it unfolds,” she said.

Harker expects inflation to ease to 4% this year, 3% next year, and return to the central bank’s target of 2% in 2025. He expects the unemployment rate, which was at 3.5% in July, to rise to 4% or possibly higher. He believes that economic growth should be moderate.

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