Wrapup 1: Fed officials largely sanguine about rise in US bond yields

Former BL Stores

05/10/2023 21:13

By Ann Saphir
       Oct 5 (Reuters) - Federal Reserve officials on Thursday
indicated little concern that the recent rise in U.S. Treasury
yields could imperil a "soft landing" for the economy, and said
it could actually help the central bank in its fight against
inflation.
    The Fed held its benchmark overnight interest rate steady in
the 5.25%-5.50% range last month, but signaled that one more
quarter-percentage-point hike would likely be needed before the
end of this year to cement inflation's downward path, and that
the policy rate would probably end next year above 5%.
        In the weeks since the Sept. 19-20 meeting, long-term
borrowing rates have risen sharply in a move that Fed
policymakers and some analysts say shows markets are buying into
the central bank's "higher-for-longer" rate projections. 
        The yield on the benchmark 10-year Treasury note hit a
16-year high of 4.8% earlier this week, up from around 4.4% when
Fed policymakers met last month. 
    "If we continue to see a cooling labor market and inflation
heading back to our target, we can hold interest rates steady
and let the effects of policy continue to work," San Francisco
Fed President Mary Daly told the Economic Club of New York. 
        And with long-term rates up, she added, "the need for us
to take further action is diminished because financial markets
are already moving in that direction and they've done the work.
We don't need to do it more." 
        Higher long-term borrowing costs discourage hiring and
investment and slow the economy, easing inflation pressures. The
rise in U.S. bond yields, while steep, has not been disorderly,
Daly said, adding "so far, so good."
        Chicago Fed President Austan Goolsbee had a similar
view, saying that while the timing of the increase in bond
yields was sudden, the upward move itself "is not a puzzle." 
    Speaking on a Bloomberg podcast that was recorded on Tuesday
and aired on Thursday, Goolsbee said, "it's clear that the long
rates coming up is what you'd expect" when recession fears that
were prevalent earlier this year have abated.
    The Fed's tightening - it has lifted the policy rate by 5.25
percentage points since March 2022 - has helped bring inflation
down from a 40-year high last summer without the surge in
unemployment that usually accompanies such a trajectory. 
    And banking sector stress that erupted with the failure of
California-based Silicon Valley Bank seven months ago did not
create a credit crunch or send the economy into a tailspin, as
Goolsbee and other Fed policymakers initially had feared.  
    "On the real side I feel like nothing has happened so far
that is convincing evidence that we are off the golden path"
where inflation heads toward the Fed's 2% goal without a
recession, Goolsbee said.
    Inflation by the Fed's preferred gauge was 3.5% in August,
about half its peak from last year, while unemployment was 3.8%
in August, compared with 3.7% a year earlier. 
    
    OPTIONALITY
    Should the rise in long-term yields trigger a surge in
unemployment or sharp slowdown in economic activity, the Fed
will react, Goolsbee said. 
    "We absolutely monitor that and are thinking about that, and
that could be a blow to either the financial or the real
economy," he noted. 
    Right now, Goolsbee added, "all eyes are on getting
inflation down."
    Daly added caveats on the other side.
        "If the deceleration of growth and inflation stall,
activity begins to reaccelerate, or financial conditions reverse
some of this tightening and loosen too much, well, we can react
to those data and raise rates further until we are confident
that monetary policy is sufficiently restrictive to complete the
job," she said. 
    "We need to keep an open mind and have optionality."

 (Reporting by Ann Saphir; Editing by Paul Simao)
 ((Ann.Saphir@thomsonreuters.com; 312-593-8342;
www.twitter.com/annsaphir; Reuters Messaging:
ann.saphir.thomsonreuters.com@reuters.net))