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Federal Reserve urged to exercise caution as Treasury yields and economic vigor increase: Powell

Fed to “Proceed Carefully” Amid Rising Treasury Yields and Economic Strength: Powell

Federal Reserve Chairman Jerome Powell emphasizes cautious approach to monetary policy decisions

Federal Reserve Chairman Jerome Powell stated on Thursday that the Fed is taking a careful approach to its monetary policy decisions in response to the recent surge in Treasury yields, which has significantly tightened financial conditions. Powell further acknowledged that the continued growth of the economy may warrant further tightening of monetary policy.

Signs of ongoing economic growth could necessitate further monetary policy tightening

Highlighting the current state of a tight labor market and the 11 interest rate hikes implemented thus far, Powell emphasized that the Federal Open Market Committee (FOMC) is proceeding cautiously with its monetary policy decisions. He recognized that the recent increase in longer-term U.S. government bond yields has contributed to the tightening of financial conditions, which could assist the Fed in its efforts to curb inflation.

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Longer-term bond yields play a significant role in tightening financial conditions

Powell stated, “Financial conditions have tightened significantly in recent months, and longer-term bond yields have been an important driving factor in this tightening.” During his prepared remarks at the Economic Club of New York Luncheon, he also noted that if the economy continues to exhibit above-average growth or if the labor market tightness stops easing, further tightening of monetary policy may be necessary to ensure progress in controlling inflation.

Strong job market drives above-trend economic growth

Powell addressed concerns about a potential recession by stating, “Many forecasts are calling for the U.S. economy to be in a recession this year.” However, he emphasized that growth is currently surpassing its long-term trend. This growth has been largely fueled by consumer spending, which is directly influenced by the strength of the job market.

10-year Treasury yield approaches 5% for the first time since 2007

Notably, Powell’s remarks coincided with the 10-year Treasury yield nearing 5% for the first time since 2007. This milestone comes amidst reports indicating the continued strength of the job market.

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Pace of inflation slows down but remains above the Fed’s target

The most recent measurement of core PCE reveals a slowdown in the pace of inflation, with the rate dropping to 3.9% in August from the previous 4.3%. However, the current rate still exceeds the Fed’s target of 2%.

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