Top Federal Reserve officials are of view that tighter financial conditions after a recent surge in US Treasury yields may substitute for additional increases in their benchmark interest rate.
Fed Vice Chair Philip Jefferson on Monday said in a conference that he would “remain cognisant of the tightening in financial conditions through higher bond yields” in assessing “the future path of policy,” echoing similar comments from other policymakers in recent days, reported Bloomberg.
The officials face the question whether the rise in borrowing costs reflects expectation among investors of a stronger economy or just requirement of extra compensation to bear the risk of interest rate.
“The markets all of a sudden are doing all the dirty work for the Fed,” said Yelena Shulyatyeva, a senior US economist at BNP Paribas SA. “It seems like the majority, including some of the more hawkish policymakers, are OK with proceeding more cautiously.”
Yields on 10-year Treasury securities rose by 40 basis points since the Fed’s September policy meeting to 4.8 per cent as of Friday’s close. Projections published after the meeting indicated another rate hike in 2023, with fewer rate cuts next year.
Fed President Lorie Logan earlier on Monday at the same conference indicated that if risk premiums in the bond market are on the rise, that “could do some of the work of cooling the economy for us, leaving less need for additional monetary policy tightening.”
Logan’s comments jibed with similar remarks from San Francisco Fed President Mary Daly, who on October 5 said “if financial conditions, which have tightened considerably in the past 90 days, remain tight, the need for us to take further action is diminished.”
Policymakers are not ready to put an official pin on the tightening cycle just yet. Jefferson on Monday said he was “particularly attentive to upside risks to inflation, such as those associated with the economy and labor market remaining too strong to achieve further disinflation.”