Will Powell Signal a Less Hawkish Stance on Interest Rates?
Federal Reserve chairman Jerome Powell is set to speak at the Economic Club of New York next week, with market participants eagerly waiting to see if he endorses recent remarks from fellow Fed members regarding the need for a final rate hike this year.
Market participants will closely watch Powell’s speech to see if he shares the same view as other Fed officials on the impact of rising Treasury yields. The recent surge in yields has raised concerns about the need for further rate hikes this year.
The Impact of Rising Yields on Monetary Policy
Since the Fed’s September meeting, there has been a growing narrative of “higher for longer” rates, which has led to a sharp selloff in Treasuries and pushed yields to 20-year highs. San Francisco Fed president Mary Daly has suggested that the surge in yields is equivalent to about one rate hike, indicating an increased risk of recession if rates continue to rise.
At the most recent FOMC press conference, Powell flagged the risk of overtightening and emphasized the need to move more slowly on rate hikes. This cautious approach has been echoed by several Federal Open Market Committee participants.
Changing Tone from Fed Members
There appears to have been a coordinated attempt by Fed officials to signal more concern over the sharp rise in yields. The FOMC September meeting minutes revealed that a majority of participants believed one more rate hike would likely be appropriate.
However, market expectations now indicate a less than 30% chance of another rate hike this year. Endorsing a less hawkish stance may cement these expectations, potentially undoing recent tightening in financial conditions.
Powell’s Potential Response
Powell may acknowledge the recent rise in yields but downplay its significance, attributing it to temporary factors such as larger issuance of Treasuries. The U.S. Treasury’s plans to borrow a near-record amount of debt in the second half of 2023 have increased supply pressures on government bonds, pushing yields higher.
While there is a risk of a mid-November government shutdown that could require the Treasury to raise more cash, Powell could argue that the pace of issuance will eventually slow, easing supply pressures on government bonds.
Maintaining Data Dependence
Recent economic data, including higher core CPI and strong job growth, supports the argument for maintaining the current data-dependent policy. Powell may emphasize the need for the Fed to continue monitoring economic indicators before making any decisions on interest rates.
Powell is expected to strike a balance in his remarks, acknowledging the rise in yields while emphasizing the Fed’s data dependence. This approach may appease both monetary policy hawks and doves, allowing the Fed to maintain its current stance.
Overall, Powell’s speech will be closely watched to gauge his stance on interest rates and the potential impact on the economy. The extent to which he endorses a less hawkish stance will depend on the recent tightening in financial conditions and the risk of a hard landing.
