Higher Bond Yields May Impact Fed’s Rate Hike Plans, says Dallas Fed President
Rising Yields and Financial Conditions May Influence Fed’s Decision Making
The recent increase in long-term U.S. Treasury yields and tighter financial conditions could potentially result in a reduced need for the Federal Reserve to further raise interest rates, according to Dallas Fed President Lorie Logan. Speaking at the National Association for Business Economics, Logan, a more hawkish policymaker, stated that continued restrictive financial conditions are necessary to restore price stability. Despite the Fed not raising its short-term policy rate since July, financial conditions have notably tightened in recent months.
Potential Impact of Higher Term Premiums on Fed’s Rate Hike
Logan highlighted that the rise in long-term interest rates might be attributed to investors demanding higher returns for holding U.S. debt over a longer period. This increase in the so-called “term premium” could potentially lessen the need for the Fed to raise the fed funds rate. The Federal Open Market Committee (FOMC) has increased its policy rate by 5.25 percentage points since March 2022, but during its latest meeting, it signaled a cautious approach, leaving the rate unchanged within the 5.25%-5.50% range.
Implications of Logan’s Remarks
Economists have taken note of Logan’s comments, particularly given her expertise in financial markets. Some experts believe that her statements suggest a decreased likelihood of further rate hikes. However, it is important to consider the nuanced nature of Logan’s speech and the fact that her views are not definitive at this moment.
While the economy and labor market have shown strength beyond expectations, inflation remains a concern. Logan acknowledged that the rise in long-term yields may reflect expectations of a robust economy, possibly necessitating additional action from the FOMC.
Factors Driving Long-Term Rates Higher
Logan emphasized that higher term premiums play a clear role in the increase of long-term yields. Factors contributing to this rise include surveys, models, and investor expectations that the Fed will continue reducing interest rates as inflation falls, even as it shrinks its balance sheet. Determining the exact proportion of higher long-term rates due to term premiums is a complex task.
Logan concluded by stating her commitment to carefully evaluate economic and financial developments to determine appropriate policy actions aligned with the FOMC’s mandate. She emphasized the importance of addressing high inflation and preventing its entrenchment or resurgence.
